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Ariel Investments Is Ready To Start Its Engines

Mutual fund Ariel Investments has filed with the SEC to disclose ownership of 2.8 million shares of International Speedway Corporation (NASDAQ:ISCA), a $1.3 billion market cap entertainment company that owns and operates NASCAR tracks. Ariel had reported a position of 2.2 million shares at the end of June, which in turn was up from about 460,000 shares at the end of March and none at the beginning of 2012. As such, the fund is taking a bullish stance on International Speedway, whose stock is up 10% so far this year. See more stock picks from John Rogers and Ariel Investments.

Chuck Royce

Hedge funds are generally not very optimistic about the stock, though its relatively small market cap likely deters some larger investors from taking significant positions. David Dreman’s Dreman Value Management, which has $5.5 billion under management, owned 1.3 million shares of International Speedway at the end of the second quarter (research more stocks in Dreman Value Management’s portfolio). Royce and Associates, managed by Chuck Royce, cut its stake but still had a position of about 890,000 shares (find more of Chuck Royce’s favorite stocks).

The company’s second fiscal quarter ending in May provided good results for the company. Revenue increased 29%, including substantial increases in both admissions and motorsports revenue (which comes from sources such as media rights and luxury suites). Expenses also increased, with the result being an operating margin equal to 18% compared to 17% a year earlier. Earnings per share rose from 25 cents to 30 cents. For the first half of International Speedway Corporation’s fiscal year revenues have eased up with operating income essentially flat. While the company did not repurchase any shares during the quarter, it is authorized to buy about $60 million in stock under its current repurchasing plan.

International Speedway Corporation may make its money off of high speed racing and the risk of a crash, but its stock isn’t as exciting. Its beta comes in at 1 and so far in 2012 it is up 10%, slightly less than the S&P 500’s return. This makes sense as autoracing, while a consumer purchase, is not as dependent on high consumer spending as some other sources of entertainment; in our mind, International Speedway is more similar to a movie theater than to a theme park, for example. The stock pays a small dividend yield of 0.7%. International Speedway trades at 20 times trailing earnings and 16 times forward estimates, as sell-side analysts expect EPS to grow 14% in 2013 compared to this year. This growth rate seems a bit high to us, though given the 20% increase last quarter it is not unreasonable.

International Speedway doesn’t have any large-cap public companies in the same business (the flip side of this is that the company has a good deal of market power), but we can compare it to other cheap destination entertainment providers. As we mentioned earlier, theaters Regal Entertainment Group (NYSE:RGC) and Cinemark Holdings, Inc. (NYSE:CNK) therefore make for good comparable companies. They trade at 19 and 17 times trailing earnings, even though we would say that the movie theaters face more competition and more challenges to their business. These companies do, however, pay high dividend yields and managed to grow their earnings last quarter compared to the same period a year earlier. Lottery services company Scientific Games Corp (NASDAQ:SGMS) and racetrack operator Churchill Downs, Inc. (NASDAQ:CHDN) are other peers. Churchill Downs carries trailing and forward P/E multiples of 13 and 17, respectively, placing it at about the same valuation multiple of its 2013 earnings as International Speedway; the company also saw its earnings rise 21% last quarter compared to the same period in the previous year. Scientific Games trades at 20 times forward earnings estimates, and we don’t think its business justifies a higher multiple than that for International Speedway. The theaters are higher priced and should only be taken as income investments. Churchill Downs is cheap compared to its trailing earnings and might make for a better value play if investors are more confident that it can maintain its current business than they are that International Speedway can continue its growth.

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