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Feeling The Need For Speedway Motorsports

 November 05, 2008 01:14 PM

It may come as a surprise to you—as it did to me—that NASCAR is the second most popular televised sport in America. There is big money in auto racing—it brings in more advertising revenue from Fortune 500 brands than any other sport. Race fans don gear emblazoned with their favorite driver's affiliated brands just as an NFL fan would wear their favorite team's jersey and such advertising is both unique and effective. It is clear that NASCAR's popularity has moved beyond its rural roots and its growth continues to surpass expectations. So, we turn our attention now to a company that is poised to reap the benefits of the increased popularity of stock car racing, Speedway Motorsports (TRK). Speedway describes itself as, "a leading marketer and promoter of motorsports entertainment in the United States." The company owns and operates seven premier racetracks, produces racing merchandise and has various other motorsports-related ventures.

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TRK reported third quarter earnings this morning that swung to a profit of 16 cents per share after losing 31 cents per share in last year's third quarter. The company narrowly missed analysts' expectations of 17 cents per share, but revenue growth was a highlight as it climbed 28% from a year ago. The company attributed a portion of its success to profitable NASCAR Sprint Cup and Craftsman Truck Series events at its newly acquired racetrack in Loudon, New Hampshire. The company touted better operating results from its merchandising subsidiary, which had been a sore spot in recent quarterly reports. Speedway also reaffirmed its full year earnings guidance of $2.40 to $2.50 for fiscal 2008.

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Speedway Motorsports has carved out a niche in the racing world, and NASCAR is reaching a broader audience than ever before. However, there are real concerns about investing in a motorsports right now. For starters, according to The Washington Post the big three auto makers are pulling back on sponsorships in an effort to cut costs in order to survive. As such, motorsports marketing budgets are likely to face the axe. BY most accounts, we are in for at least a few more quarters of recession or at best slow growth and many NASCAR marketing contracts will be coming due during this period. How willing will these companies be to continue expensive sponsorships in a tough economic environment? We expect many NASCAR sponsors, many who just hopped on the bandwagon, to opt against such spending citing economic necessity. Most NASCAR teams get up to 80% of their revenue from corporate sponsorship. Surely a slowdown in advertising and marketing dollars flowing into motorsports is a concern for Speedway and other entities tied the sport.

Even with the prospect of NASCAR facing a decline in sponsorship dollars, the valuation for TRK remains appealing. Historically speaking, Speedway has traded for between 9.8x and 14.6x cash flow, but the current price-to-cash flow appears very cheap at just 4.4x. Similarly, price-to-sales is currently only 1.1x but has historically ranged (for this company) between 2.1x and 3.2x. The company has gotten back on the right track by swinging to a profit this quarter and, if it can successfully navigate this downturn, should fetch a much higher price in the future as it is trading near a 12 year low. One other note on Speedway, this is the seventh consecutive year that it has increased its dividend and, while TRK's dividend yield is not substantial, Ockham views this as a management decision that reflects the company's financial strength going forward.



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