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Has the Engine Behind NASCAR Sputtered?
NASCAR’s track operators, Speedway Motorsports (TRK) and International Speedway (ISCA), have suffered from declining revenues over the past five years, with that figure dropping by 1% - 2% on an annualized basis over that period. Furthermore, earnings dropped at hefty double-digit rates annually over that period. It is a change of fortune for the companies, which saw their revenues more than triple from 1997-2008.
While the two companies generally seem to see the same trends, their business models differ. For example, Speedway Motorsports, which owns and operates speedways in the southeastern U.S., Las Vegas, Nevada and Sonoma, California, is a high dividend payer, with a payout ratio of 60% in 2012 and a dividend yield significantly above the Value Line median. By contrast, International Speedway, which owns and operates 13 motorsports facilities in the U.S., including Daytona International Speedway and Talladega Superspeedway, has traditionally paid a meager dividend, opting instead for a less-leveraged balance sheet and greater capital spending.
The most common explanation for the two companies’ recent woes is that the recession of 2007-2009 was a game-changer. In particular, the lackluster job and income growth in the U.S. economy over the past few years has disproportionately affected the sport’s middle class fan base. The shift is all the more concerning because the previous U.S. recession, in 2001, had a relatively modest effect on revenues, and the sport rebounded strongly in the following years. But not all recessions are created equal. That of 2007-2009 involved high household debt, and a plunging of median home prices, with a spike in foreclosures. These trends hit the middle class right where it hurt, as a disproportionate amount of their net worth was invested in their homes. Making matters worse, the recession led to a decline in household incomes, wiping out most of the gains in that metric over the last 15 years, if not more, for middle class households. All of this has led to significantly depressed spending habits among NASCAR’s core demographic.
While only about a quarter of revenues come from ticket sales for both companies, declining admissions revenues and weak pricing have been glaring signs of NASCAR’s troubles in recent years. However, with housing and employment indicators finally showing sustained growth in recent months, the clouds are starting to clear for the industry. International Speedway reported the first increase in average ticket price in three years for this year’s Daytona 500. Furthermore, the event’s TV ratings were the best since 2008.
Indeed, broadcasting and sponsorship fees account for a hefty portion of both companies’ revenues, and hopes for the industry have been bolstered by NASCAR’s early renewal of its contracts with FOX, which is owned by News Corp. (NWS), late last year. There had been concerns, due to disappointing ratings over the past few years, that it would not see an increase in its contract renewal. However, the deal, valued at over $2.4 billion, was a significant increase over its previous agreement, though not as significant an increase as Major League Baseball and the National Football League got in their recent renewals. While the sport has struggled with some coveted demographics, its viewer base is large and geographically broad. NASCAR also has a much longer season than most other professional sports.
Reacting to concerns over the lagging popularity of motorsports, NASCAR has begun implementing a five-year industry action plan. One of the goals of the plan is to build on the star power of individual drivers, as star drivers have been key to drawing viewers to the sport in the past. In particular, NASCAR intends to focus on developing emerging drivers, identifying young talent at the local level, with an emphasis on promoting those with charisma as well as talent. Another is to raise engagement in the sport among Generation-Y viewers and those younger, addressing concerns over the aging of the traditional fan base. A key aspect of the plan involves attracting a multicultural fan base, as that demographic becomes increasingly important, and the sport struggles to shed the image of being targeted at a working-class white audience.
Crafting a more cohesive digital and social media strategy is another challenge. Having largely entrusted the running of its Web content to others in the past, NASCAR has now taken over control of its twitter feeds and seems set to take over more of its digital operations going forward. One exception to this policy, interestingly, is that it intends to work with Spanish-language outlets to create better-targeted content for the Hispanic audience. Lastly, it intends to improve the racetrack experience for fans, in particular, by using consumer surveys and data to better gauge what makes the experience so enjoyable for some fans and how to make it more welcoming to new fans who are less familiar with the party-like atmosphere of race attendance.
We believe that the momentum from the economy’s gradual strengthening will fuel a return to revenue and earnings growth over the coming 3 to 5 years. However, the shares still appear unlikely to deliver exceptional long-term returns. It remains unclear if and when the companies will approach their record performances, reached during the middle of the last decade. Furthermore, both companies have seen steady declines in profit margins and return on shareholder’s equity over the past 10 years, which may indicate a weakening of the business model that could prove difficult to reverse.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.