Dover International (DVD) basically runs the Dover International Speedway. It makes it money through hosting two Nascar Sprint Cup races at the venue. In addition it also hosts a few other Nascar races at the venue. The real money however comes from the two Nascar Sprint Cup races.
The company is in a bit of a turnaround currently as it has announced the closing of two of its other courses – in Nashville and Memphis. The Nashville and Memphis courses were actually loosing money while the Dover Course has been making money. this is not surprising as those courses didn’t host a sprint cup race. The closing of Nashville and Memphis is thus actually a positive in a couple of ways – (a) it shows management is willing to cut its losses rather than engaging in empire building and (b) it allows shareholders to benefit from the Dover course’s superior economics without having to subsidize the money loosing Nashville and Memphis properties.
The Memphis facility has already been sold and its probably reasonable to expect the same from the Nashville property. The company has estimated the fair value of the Nashville facility to be $30m. They actually took an impairment charge of $15m when they made the announcement in August 2012, so the $30m is a recent valuation. None the less its possible that the company gets a lot less than the $30m it is currently carrying the property on its books at. Either way the company has a market capitalization of $50m and the sale will generate significant cash-flows to help pay down debt which has been reducing but still stands at approx $30m.
The company has been generating operating cash-flows for the last few years and I expect these to increase without the Nashville facility weighing Dover down. Modeling the cash-flows is surprisingly straightforward as the company discloses the purse/sanction fees and broadcast revenue it receives for events. So we know the broadcast revenues will be approximately $25m for 2012 and purse/sanction fees will be approx $12m.
In addition the company will generate admissions revenue from sale of tickets and event revenue from sale of luxury suites and concessions. Against these it will have to pay operating expenses and general and administrative expenses. Historical financials are helpful for this as we know most of the revenue and costs come from the Dover facility. For 2011, two of the three September events fell in the fourth quarter. These two events generated approx $10m of event and admissions revenue (and $12m of broadcast revenue). These events also had expenses of approx $13m. Thus two/thirds of one event weekend in 2011 at Dover generated approx $10m of FCF before interest expense. One of these two events is the Sprint Cup race thus its probably reasonable to assume that FCF represents atleast 90% of the total FCF generated that weekend.
The June event is actually even more of a FCF generator as it commands higher broadcast revenue and attendance. Either way, the two events combined should generate around $21m of FCF. Interest costs for q1 2012 were $400,000. 2011 interest was around $2m. For conservatism lets assume the same for this year. Expenses in the two quarters without races should also be reduced in our FCF calculation. q1 2012 had expenses of around $4m. Thus we can reduce our estimate of FCF by $2m (interest expenses) and $8m (operating expenses in two quarters when no race is held). This leaves us with approx in $11m in FCF. For a company with a market capitalization of around $44m thats not too shabby.
There are a couple of things about this company that do give me pause however. First, is attendance at Dover has been dwindling. While it is a marquee track and I expect it will remain on the calendar, there is a possibilty of the number of races being cut to 1. I simply do not know enough about Nascar yet to know how likely this scenario is. There has certainly been speculation in the press about this happening. Attendance at the last event was abysmal again and this drove a lot of the speculation. With the economy as a whole not undergoing a robust rebound, it seems like the average Nascar fan has chosen not to attend the races.
The second area of concern is management. While management has shown a willingness to shut unprofitable tracks, they have not shown any willingness to sell the company at above market prices. Nascar is dominated by two larger race track operators (one of whom controls Nascar) and both have publicly said they would like to acquire Dover but management has refused to negotiate. This appears to be a case of management protecting their jobs and treating a public company as a family business.
With a new contract for Nascar due over the next couple of years, the broadcast revenue should materially increase. In conversations with various TV executives, it is quite clear that Nascar is a much in-demand property. Despite the drop in ratings, there are still only a few events that are as “DVR-Proof” as sports. There is some question about how much of the new economics Dover will get (vs. drivers and the managing body) but it should still result in an increase.
The sale of the nashville property also provides an opportunity to reduce debt. With the company poised for a turnaround, the share price has been increasing quite a bit after a dramatic sell-off last year.
hat-tip to the old deepvaluedriver blog