Ariel Revs Its Engine In International Speedway

At the end of August, Ariel Investments reported a position of 2.8 million shares in International Speedway Corporation (NASDAQ:ISCA), which gave it 11% of the shares outstanding. Apparently over the past couple months the fund, which is managed by John Rogers (find more stocks owned by Ariel Investments), has decided to get more aggressive on the provider of motor sports entertainment: a more recent filing shows it owning 4.5 million shares of stock in the company. This gives it nearly 17% ownership. The stock rose in the month of September, but dropped in early October after the company announced that it had missed earnings targets in the fiscal quarter ending in August.

Revenue fell 23% higher in that quarter (the third of its fiscal year, which ends in November) compared to the same period last year. Expenses fell, but at a slower rate and so earnings per share for the quarter came out to a loss of 2 cents. The 64 cents per share that International Speedway Corporation earned in total for the first nine months of the year was down from the 90 cents of EPS at the same point last year. It also annualizes to a P/E multiple of 29, demonstrating that the market expects solid earnings growth over the next few years (indicating that while last quarter was good, it was not enough to justify what the stock price had been at that time). The forward P/E is 15, suggesting that investors might not have much patience.

Chuck Royce

Joining Ariel in International Speedway Corporation at the end of June were David Dreman’s Dreman Value Management and Chuck Royce’s Royce & Associates. Dreman reported owning 1.3 million shares, which was about even with what the fund had owned at the beginning of April, while Royce cut its stake slightly over the course of the second quarter to about 890,000 shares. We’d note that in terms of market value this didn’t represent a large share of either fund’s portfolio (see David Dreman’s and Chuck Royce’s favorite stocks).

There are a few different types of companies that can be compared to International Speedway. One group would be cinemas such as Regal Entertainment Group (NYSE:RGC) and Cinemark Holdings, Inc. (NYSE:CNK). These companies’ stocks are priced about even with International Speedway’s on a forward basis, with P/Es in the 15-17 range. However, their businesses have been more stable in recent quarters, with earnings in the last quarter within 5% of the figure from the third quarter of 2011. These two companies also pay good dividend yields. We would note that there is very high short interest at Regal, but overall these peers seem more attractive.

We’d also look at horseracing track operator Churchill Downs, Inc. (NASDAQ:CHDN) and gaming services company Scientific Games Corp (NASDAQ:SGMS). Churchill Downs trades at 16 times earnings, on both a trailing and a forward basis, with sell-side analysts expecting little change in net income next year. Earnings were down 70% in the third quarter versus Q3 2011, though the top line was roughly unchanged. We think that we’d avoid the stock until it shows that it can stabilize. Scientific Games carries a forward P/E multiple of 22, and is actually unprofitable on a trailing basis; with sales not looking particularly good, we don’t think that it’s a good stock to buy either.

Churchill Downs and Scientific Games look like poor companies to invest in, but International Speedway doesn’t seem much better and so we’re not sure why Ariel is so excited about the company. It is quite high priced relative to its recent earnings and it seems like cinemas might offer considerably better value.

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