Will Q2 Earnings Make International Speedway Stock Great Again?
You’re probably not at all surprised by this, but President Trump has very high support among NASCAR fans. According to a report from The Washington Times, they give POTUS a 64% approval rating. But can racetrack operator International Speedway Corp (NASDAQ:ISCA) receive a presidential boost for ISCA stock?
If the company’s second-quarter of fiscal year 2018 earnings report is anything to go by, I wouldn’t hold my breath. It’s not that the actual figures were disappointing in and of themselves. Rather, management provided no surprises to either end of the spectrum. To summarize, International Speedway will likely maintain its current trajectory, rendering ISCA stock a speculative effort.
Let’s dive into the details. Wall Street pegged ISCA to deliver earnings-per-share of 37 cents. The company hit that target right on the dot. The earnings haul was a significant improvement over the prior-year Q2, when management delivered EPS of 30 cents. That said, this year was only a minor improvement over Q2 2015 results, which produced EPS of 35 cents.
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Investors saw a little more excitement on the revenue front, where the company hauled in $171.68 million. This figure was up 1.24% above consensus estimates. Moreover, ISCA exceeded the year-ago level’s tally of $165.28 million by a 3.9% margin. According to Zacks, “The company has topped consensus revenue estimates two times over the last four quarters.”
As I mentioned earlier, Q2 wasn’t disappointing; indeed, if you didn’t have the broader context, you’d assume that International Speedway produced fairly solid results. And while ISCA stock is a surprise winner this year, up 15.6% since the January opener, I wouldn’t get too exposed to this recovery story.
Like most head-fakes, you must read between the lines. Specifically, ISCA stock faces three big challenges:
Racing Is an Acquired Taste, Which Bodes Poorly for ISCA Stock
One of the toughest challenges for ISCA stock is the underlining company’s product, which of course is motor racing. If you really want to split hairs, ISCA provides the facilities for which motor racing occurs. But in either case, if the product isn’t exciting, you’re not going to make much money.
That’s a huge problem for International Speedway because the product is an acquired taste. To put it more bluntly, auto racing is boring.
Now before you bombard me with hate mail, let me explain myself. I love racing. In fact, I exclusively drive manual-transmission cars. My heart breaks because most automakers, whether General Motors (NYSE:GM), Daimler (OTCMKTS:DDAIF), Toyota Motor (NYSE:TM) or any other manufacturer, usually only offer slushboxes.
Even Ferrari (NYSE:RACE) — Ferrari! — has abandoned the iconic gated-manual transmission, never to return again.
The problem with motor racing as a marketing device is that the sport is very subtle. Racing, especially the oval racing for which NASCAR is famous, is an ongoing physics problem. The challenge is to be the driver that scrubs the least amount of speed going around the corners.
To accomplish this on a consistent basis over hundreds of laps requires super-human concentration and conditioned-muscle memory. I respect the incredible talent required to do something seemingly simple like driving a car around a circle.
The issue is that for the lay person, NASCAR is exactly that: cars driving around circles. Yes, auto enthusiasts realize there’s much more to it than that. But the difficulty for International Speedway is converting that lay person to becoming a rabid fan.
I’m sorry, but it’s just not going to happen, which is why I’m pessimistic about ISCA stock.
Racetrack Attendance Is Down Almost Everywhere
Admittedly, my argument about racing being boring is an opinion. In my defense, I believe it’s an informed opinion because overall interest in sports has changed dramatically from prior generations. You can look at almost any sport: viewership has declined across the board.
But one thing that cannot be denied is that the dearth in sports viewership and fan attendance has especially hit motor racing. Last year when I discussed ISCA stock, I wrote the following:
The biggest challenge is attendance. The famous stock car racing organization NASCAR is a crowd favorite, and it has significantly improved its fan experience. Nevertheless, it has been for naught, to the chagrin of ISCA. NASCAR stopped providing attendance figures in 2012, and for good reason. According to Sports Illustrated‘s Eden Laase, “… at many races, empty seats can be found in abundance.” Needless to say, as the facilitator, ISCA needs to find human butts to fill those seats.
So a year in, have they found those crucial butts? As with every other year, the answer is a big, fat no. During the Q2 conference call, International Speedway president John Saunders stated that the company experienced “attendance related headwinds.” Saunders did his best to detract from the real reason why attendance declined, blaming factors such as the weather.
But did weather cause such sharp attendance declines in 2012 that NASCAR stopped providing attendance figures? No, of course not. The common factor is that NASCAR racing — and other racing disciplines — is boring. Or it could be the greatest sport in the universe.
But if you’re not attracting customers to your product, it usually means something’s wrong with the product, not the people.
NASCAR Has a Demographic Problem
NASCAR has an incredibly white fan base. Indeed, NASCAR is whiter than the NHL. Among major televised sports, NASCAR is in fact the whitest of them all.
But it’s not just about skin color. NASCAR fans also make less money than fans of other sports. Which is to say that stock-car racing fans belong to an increasingly rarer demographic: lesser-educated, very conservative white men.
The issue for ISCA stock is that Millennials represent the largest and most-diverse demographic in America. According to a Brookings report, 44% of Millennials are non-white minorities. And even white Millennials are likely to be college-educated, and therefore, unlikely to watch NASCAR.
Sure enough, that’s what we’re seeing. NASCAR attracts younger drivers, but the sport itself doesn’t attract younger fans. This is not a survivable situation in sports entertainment because the U.S. demographic is likely to become browner, not whiter.
The one, small bright spot for ISCA stock is IndyCar racing. A USA Today article published in April indicated that IndyCar is on the upswing, while NASCAR is trending south. Open-wheel IndyCar is a faster, and arguably more exciting product than its stock-car rival, so this dynamic makes sense.
If only we could have a separate IndyCar-related investment! But as it stands, a racetrack operator that showcases both sports is a mixed bag.
That’s because IndyCar can’t carry itself and NASCAR. Outside of marquee events, such as the Indianapolis 500 and the Long Beach Grand Prix, IndyCar doesn’t fill racetrack seating. As a business model, it operates within the limitations of the general sports market, and does fine.
But as an overall investment, ISCA stock isn’t up to snuff. If you’re profitable on this, I’d take the money before it stalls out.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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