Looking to rev up your investment portfolio? Consider investing in one of the public companies involved in the fine art of motor racing, analysts say.
Motorsports have zoomed into the mainstream in the past few years, driven by the emergence of racing superstars such as Jeff Gordon, as well as increased television coverage and corporate sponsorship. Fan interest in the sport, its stars and related merchandise has a number of these publicly traded motorsports-related companies “gassed up and ready to grow,” says one analyst.
“We’re very bullish on the whole sector,” says analyst Breck Wheeler of Nashville-based J.C. Bradford & Co. “You’ve got a few big companies that are enjoying a growing interest level from the American public, and it’s a very closed society, so to speak, because there are huge barriers to entry.”
One of the big drivers, in terms of growth and interest, has been NASCAR and the Winston Cup series, she says. NASCAR (National Association of Stock Car Auto Racing), represents the most popular form of racing in the United States today in terms of attendance and media exposure. Internationally, open-wheel racing, like that found at the Indianapolis 500 and Formula One races, is the largest. Drag racing, which involves high-speed sprint races on a straight-line drag strip, is also growing in popularity. About 17 million people attended races in the U.S. last year, according to estimates. Wheeler and other analysts offer two ways to play the stock car market: track operators and merchandise companies.
The track operators are essentially “entertainment companies,” Wheeler says. She recommends International Speedway (NASDAQ: ISCA) and three other track operators–Speedway Motorsports Inc., (NYSE: TRK), Penske Motorsports Inc. (NASDAQ: SPWY) and Dover Downs Entertainment(NYSE: DVD)–as potential investments.
Collectively, the four companies control 70 percent of the races on the 33-stop Winston Cup series, which has added a race for the coming year.
These four companies have seen revenues and profits accelerate in recent years, with growth coming from seats, suites and advertising. The thing that will help operators put the pedal to the metal in the future, though, is broadcast fees.
Unlike, say, the National Football League, where teams in small markets get the same cut of broadcast rights as large-market teams, motorsports track operators negotiate their own broadcast deals. So a company such as International Speedway, which owns Daytona International Speedway and the Daytona 500 race, doesn’t share broadcast fees with other track operators on the NASCAR circuit. Track operators do split about a third of the broadcast fees with NASCAR and the drivers.
Broadcast fees have been increasing at a dramatic pace, from an average $500,000 per race in 1994 to the estimated $5.5 million that was recently paid to broadcast 1999 Winston Cup races at Miami-Dade Homestead race track in Florida and the Phoenix International Raceway in Arizona.
And broadcast fees are nowhere near the finish line. As track operators renegotiate expiring broadcast contracts over the next few years, the fees will continue to increase above the $5 million mark, Wheeler estimates. She expects such fees to reach $10 milion to $11 million for tracks in major markets by 2001.
“It’s a money machine,” Wheeler says, “and the TV stuff goes right to the pretax line.” Because there are almost no costs associated–except for some administration and legal fees–the broadcast fees are as close to pure profit as an owner can get.
The other big contributor to revenue and profit growth at the tracks are seats and corporate suites, which track operators have been adding at a record pace. The prime example of this strategy is Concord, N.C.-based Speedway Motorsports. The operator of six tracks, including major raceways in metropolitan Atlanta, Dallas and Charlotte, Speedway Motorsports has increased its permanent seating capacity at a compound annual growth rate of 25.8 percent over the past five years. The company added more than 236,000 seats in 1997, and recently completed an expansion of its Bristol Motor Speedway track, where it added 19 luxury VIP suites and upped its total capacity to 133,000 seats.
The additions helped Speedway post record revenues and net income through the first nine months of 1998. Speedway reported net income of $33.5 million, or $0.81 per share, in the nine months ended Sept. 30, 1998–a 22 percent increase over the prior-year period.
“Our basic philosophy is to maximize the revenue potential of our current assets, and we are pushing the envelope at our facilities (by adding seats),” says Lauri Wilks, Speedway Motorsports’ vice president of communications and general counsel. “When you host an event, you’ve got a certain amount of cost just opening the gates. Once you’ve cracked that nut and covered the cost, additional dollars go to the bottom line.”
From a shareholder’s perspective, adding seats represents an attractive return on investment. Speedway figures the investment in an additional seat is about $375, but that each new seat brings in about $75 in revenue at each event. With about two Winston Cup events per facility each year, the payback on a seat is less than three years’ time.
With access to public capital and strong cash flow from operations, track operators have the financial ability to continue adding capacity to their tracks. They should be able to sustain 15 to 20 percent earnings growth for at least the next five years, predicts analyst Steve Eisenberg of New York-based CIBC Oppenheimer.
“Demand in this sport still exceeds supply today,” he says. “The racing audience continues to grow with rapidity. And new wholesome, family-oriented tracks should help attendance levels grow well into 2000.”
Eisenberg follows virtually all of the publicly traded motorsports companies. Like many of his analyst peers that follow the industry, he doesn’t just crunch the numbers; he’s also a fan. “I love it,” he says. “I get to three or four races a year. It’s great.”
He also loves motorsports stuff, especially collectibles such as NASCAR die-cast replica cars, hats and apparel. Fans have revved up sales of motorsports-related items over the decade. Sales of NASCAR-licensed products, for example, climbed to $900 million in 1997, versus about $80 million in 1990.
Among the merchandisers, Eisenberg likes Action Performance Companies Inc. (Nasdaq: ACTN), a Phoenix-based marketer and distributor of motorsports collectibles, apparel, souvenirs and other memorabilia. Action Performance has license agreements with popular drivers and operates through a variety of distribution channels, including specialty retail stores, the Internet and a fleet of semi-trucks that sell items track side during races.
“They are the critical merchandiser to the industry,” Eisenberg says. “Action has captured every single key distribution channel and fan support is solid because merchandise is the way for people to identify with the drivers.”
He estimates that Action Performance can maintain 25 percent bottom-line growth over the next three to five years.
Another top motorsports merchandiser is Glen Ellyn-based Racing Champions Corp. (Nasdaq: RACN), which is best known for its die-cast replicas of cars from popular racing series, including NASCAR. Racing Champions, which also sells collectibles and apparel through more than 20,000 retail outlets throughout North America, stepped on the gas in 1998, with record results through the first nine-months of the year. For the nine-months ended Sept. 30, 1998, Racing Champions posted net sales of $121.9 million, an 84 percent over the prior-year period.
Net income for the nine-month period nearly tripled to a record $13.3 million, or $0.81 per diluted shares, compared with the previous year. All things considered, it could be a while before the motorsports businesses hit the skids.
