International Speedway’s Long-term Sales Challenges

International Speedway (Nasdaq:ISCA) owns a very appealing collection of 13 race facilities across the U.S. Most of its business stems from the highly popular NASCAR racing events, with professional football the only sport that is more popular in the U.S. The problem is, NASCAR's popularity may have peaked, and the company is struggling to grow in this more challenging environment, though currently it does appear to be ringing more profits in the face of stagnant sales. (To learn more, check out Earnings Power Drives Stocks.)

TUTORIAL: Earnings Quality

Second Quarter Recap
Revenue fell 2.4% to $138.8 million to continue a long string of stagnant top-line trends. Management stated that quarterly sales results were weak, with "attendance-related revenues facing headwinds from the slow economic recovery" and were also due to the timing of when certain races were held compared to last year's second quarter. International Speedway reports sales in three primary categories. Admission revenue dropped 16.1% to represent just over 21% of total revenues while food, beverage and merchandise sales also decreased, falling 11.5% to make up nearly 8% of total sales. Motorsport revenue was the biggest contributor to total sales at nearly 70% and grew 4% on higher television broadcast and related media revenue.

Management was able to control total expenses as they fell 5.1% to $114.7 million on a decline in motorsport-related costs and SG&A expenses. As a result, operating income improved 13% to $24.1 million. This represented a healthy operating margin of 17.3%. Lower interest rate expense helped send net income ahead by 15.7% to $11.9 million. Lower shares outstanding sent earnings up 19.1% to 25 cents per diluted share. (For more on cost saving, read How Budgeting Works For Companies.)

Outlook
For the full year, International Speedway projects sales between $635 million and $650 million and earnings in a range of $1.60 and $1.80 per diluted share. For all of fiscal 2010, the company reported sales of $645.4 million and $1.13 in diluted earnings per share, meaning sales will likely be flat compared to last year, but profits should rise at least 41% on a reported basis.

The Bottom Line
International Speedway owns a collection of highly valuable racetracks across the country and NASCAR is a hugely popular sport, with an estimated stadium capacity for 1 million fans each year and a 75 million total fan base. However, this fan base has been stagnant in recent years and was adversely affected by the recession, as were other leisure and entertainment activities from rivals including Vail Resorts (NYSE:MTN), Churchill Downs (Nasdaq:CHDN), MGM Resorts (NYSE:MGM), and Regal Entertainment (NYSE:RGC).

Looking at the financials, sales have fallen close to 3% annually over the past five years while profits are down more than 17% annually over this period. At a forward P/E of almost 19, the valuation appears disconnected from the weak operating trends International Speedway is posting, though there is definite and sustainable value from the assets it owns and management appears to be boosting profits in the face of challenging top-line trends.

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