Dover Motorsports (DVD): Two Racetracks on 1,770 Acres and 65% of the TV Rights to 2 NASCAR Cup Series Races a Year for Just $60 million
I mentioned this stock on a recent podcast. This is more of an initial interest post than usual. It’s likely I’ll follow this post up with one that goes into more detail. Two things I don’t analyze in this write-up are: 1) What this company will look like now that it is once again hosting races at Nashville (in 2021) and cutting back races at Dover. 2) What the normal level of free cash flow is here. I discuss EBITDA. But, I think normalized free cash flow is the far better measure. And I don’t discuss that at all here. Finally, I haven’t dug deeply into NASCAR as a sport to get enough of a feel for whether it is durable and likely to increase or decrease in popularity in the years ahead. This is critical to analyzing the investment. And it’s the next logical step. But, this write-up was already getting long. So, better to do a deeper follow-up later and stay at the more superficial level for this first analysis.
Dover Motorsports is a $60 million market cap New York Stock Exchange listed company. It has two classes of stock. The super voting shares are owned by Henry B. Tippie (the now over 90-year old chairman). That leaves about $30 million worth of float in the common stock. Enterprise value is similar to – maybe a bit lower than – the $60 million market cap. As of March 31st, 2020 – the company had $5 million in cash on hand. Liabilities are generally stuff like deferred revenue (cash received that’ll be earned when a race is hosted later this year). The one exception is a bond issue I’ll discuss in a minute. The balance sheet shows about $4 million in liability related to that bond issue. The reality is that there could be another $10 million owed on those bonds. Or – as seems more likely now – the company could invest in some cap-ex instead and even that $4 million liability might go away. Why is that?
The liability is tied to bonds issued by the Sports Authority of Wilson County, TN. These bonds were issued as part of the funding of the Nashville Superspeedway. It’s a racetrack about a 40-minute drive from Nashville that was built by Dover Motorsports 20 years ago. The racetrack is big. It was originally on 1,400 acres of owned land, now down to 1,000 acres of land that hasn’t been sold off. It’s also – if you look at a list of where NASCAR and non-NASCAR races are held – much more in line with NASCAR type tracks in terms of the construction of the track (concrete), its length (1.33 miles), and the amount of seating. However, the track had never held a NASCAR Cup Series (think of this as the “major leagues” of U.S. auto racing) race. Without hosting such a race, it never made money. And, in fact, it hasn’t been operated in any way for close to 10 years now. However, I did just say “had” not held a race instead of “has” not held a race. There’s a reason for that. While I was researching Dover Motorsports, the company announced it would be holding one of its two NASCAR Cup Series races at Nashville in each of the years 2021, 2022, 2023, and 2024 instead of the usual two weekends of racing at its Dover International Speedway location. This complicates valuing the company quite a bit. Nashville had never hosted a NASCAR Cup Series race (another track in the area, not owned by Dover Motorsports, had hosted races in the Nashville area long ago – but not this track). Meanwhile, Dover had hosted two NASCAR Cup Series races each year for close to 50 straight years now. On the podcast, the way I talked about valuing this stock was by treating Nashville as a closed down property of 1,000 acres left to sell off and counting Dover merely for its earning power (not its asset value). Now, we have to look at 3 assets (one intangible and two tangible).
A buyer of Dover Motorsports stock today is paying about $60 million for 3 assets:
- 2 NASCAR Cup Series races per year
- Nashville Superspeedway (1,000 acres in Wilson County, TN)
- Dover International Speedway (770 acres in Dover, DE)
Now, it’s important not to double count these assets. A race promoter needs to combine a track and a NASCAR Cup Series race to get the economic benefit of each. Tracks that don’t host top-level NASCAR events aren’t very profitable. Dover Motorsports used to own several other tracks. It closed them all down and sold them off when it couldn’t get NASCAR Cup Series dates for them. Likewise, you obviously won’t get a NASCAR sanctioned racing date if you don’t have a NASCAR caliber track to host it at. This is why I said earlier that Nashville will probably be doing some cap-ex. You can’t not host a race at your track for a decade and then host a NASCAR Cup Series race without putting in millions of dollars.
On the other hand, it’s important to think of each asset’s “highest and best use”. Is Nashville’s best use hosting one NASCAR Cup Series race a year. Or is its best use being sold off.
How much would Dover get in after-tax cash if they sold all 1,000 acres at Nashville?
There were two different deals to sell all of the Nashville property. Both fell through. Pieces of the property have been sold off over time. The property seems like it MAY be held at a slightly low valuation if sold piece by piece over time in an orderly fashion. But, I’m not knowledgeable about real estate in the area or about the costs an owner would have to shoulder when actually taking the racetrack portion of the property. Here’s what we know. The company carries Nashville on its books at about $21,000 per acre. The property was marked down from an original cost of about $68,000 an acre with all improvements etc. Obviously, that cost was for a brand new racing track. It has depreciated over time. And any new owner would not use the property for racing. So, the value is likely to be closer to raw land than anything else. Various offers and options and so on for the property have been done between $35,000 and $68,000 an acre. I believe the value of land in the area has gone up over the last 10 years or so. There are other complications though. The company could have to pay taxes. And the company would have to assume payment on the bonds that have been paid through property taxes and incremental revenue from the Nashville property. My best estimate is that Dover Motorsports has about $10 million in additional “off balance sheet” maximum liabilities (this is undiscounted – it’s the actual amount that would need to be paid over a long period of time, not tomorrow) from the Wilson County bonds. There’s more than that in face value on the bonds. But, Dover Motorsports already shows that on its balance sheet (I netted the $5 million in cash against the on balance sheet liability when I told you the enterprise value here was about $60 million). The off balance sheet portion of the debt works out to about $10,000 an acre. I don’t know enough about the tax situation to judge how much could be due. But, there’s a simplification we can make here. If Dover only sells the property for about its current book value plus $10,000 an acre (to cover the Wilson County bonds), we can guess that taxes on gains on the land would be minimal. Yes, the company would be reporting major gains to shareholders on the land sales. But, we know the property would still be sold at big discounts to what it was originally put on the books at.
So, let’s ask the question: could the Nashville property be worth $25 million after taxes. Well, it’s 1,000 acres of property. That’d be $25 million / 1,000 = $25,000. But, it would need to be sold at $10,000 per acre more than that to cover liabilities associated with any bonds. That’d be $35,000 an acre. There could be taxes on some parcels of land. And some acres could be worth a lot less – if there are significant costs associated with repurposing the land. However, there were offers for the entire property – but, remember, these offers were eventually abandoned – that did value the total property about that highly. So, the book value of the Nashville property – about $21 million – seems solid to me even in cash, after taxes, and accounting for the off balance sheet liability. In other words, it seems like the valuation on the Nashville property is a bit low. And sales of pieces of the property will result in gains. This means you are probably paying more like $40 million for 2 assets:
- 2 NASCAR Cup Series races each year
- Dover International Speedway (770 acres in Dover, DE)
However, it now appears Nashville will not be sold over time. It will host a race. New cap-ex will go into it – instead of cash from the sales of property coming out of it. And – if Nashville really does host events in each of the next 5 years – those bonds aren’t going to need to be paid off by Dover Motorsports. The property taxes and incremental revenue from the Nashville property will cover more of those bonds than I expected.
On a present value basis, these factors DON’T offset. However, on a plain dollars to dollars basis – ignoring when cash flows happen – they probably do. I’d expect that Nashville will put about $10 million into getting ready for its first NASCAR Cup Series race in 2021. And I’d expect that hosting races in each of the next 5 years will take care of all liabilities not on the balance sheet. It may, in fact, remove those liabilities we now see on the balance sheet. However, I’m not sure when Dover Motorsports will make that determination from an accounting perspective. Certainly, the decision to put the present value of the contingent liability on the balance sheet was made at a time when the company was looking to sell the Nashville Superspeedway and believed its chances of hosting a NASCAR Cup Series event there were basically nil.
So, the last question we have to answer is what is a NASCAR Cup Series date worth? Here we are talking about a race when attached to a track that can host such a race. You can read this Value Investor’s Club write-up (from about 8 years ago ago) where the author thought that – in acquisitions – each NASCAR series date was going for about $150 million back then. Remember, the market is valuing 2 NASACAR series dates here at $40-$60 million (that’s $20-$30 million per racing date – depending on whether you assume both dates are Dover and Nashville is sold, or Nashville is kept and dates split between Dover and Nashville from now on). Do I really think Dover Motorsports with its two dates and two tracks is worth $300 million?
No. I don’t.
But, I’m equally unsure it’s only worth something like $60 million. Both a $300 million valuation and $60 million valuation seem outside the range of reasonableness I’d come up with for this stock’s appraisal.
And – as absurd as a $300 million valuation sounds now – I do have to admit the author was not off in terms of what was then being paid for NASCAR promoters (including Dover Motorsports itself). About 10 years ago, Dover Motorsports only had 2 racing dates. It had a ton more debt than it has now. And it had some bad properties with little hope of attracting additional NASCAR races. It seems very likely that any offers made for the company back then were really just for the 2 NASCAR Cup Series weekends hosted at Dover. If I do the math, the enterprise value at which the highest of those offers – it was $6 a share – would value the company at around $300 million. I don’t think NASCAR Cup Series races are valued at $150 million each now by private owners. However, I do think that Dover Motorsports is actually a more attractive asset in all other ways (other than the huge decline in NASCAR’s popularity) than it was 10+ years ago when it rejected that $6 a share bid.
This brings us to valuing that asset as it exists today. How much are those 2 NASCAR Cup Series each year worth?
Well, there’s a few ways to look at this. Let’s start with the going private transactions involving the last two other publicly traded NASCAR promoters. One was International Speedway and the other was Speedway Motorsports. Both went private – they were both taking out by a controlling, super voting shareholder – at 8 times EBITDA. We can assume – because of who took them out in each case – that insiders believed the stock was worth more than 8 times EBITDA. Tax rates have also been lowered since then. While applying tax rate adjustments to EBITDA is an imperfect process – it’s definitely safe to say that 8 times EBITDA under 35% taxes becomes at least equivalent to 9 times EBITDA under 21% taxes. What owners care about is after-tax free cash flow. Not EBITDA. Also, we have the economies of scale issue here. Dover is a publicly traded, NYSE listed entity that holds only 2 NASCAR Cup Series events a year. It also has had a drag from a track not hosting a NASCAR Cup Series race in every single year of its past history (long ago, it had multiple money losing tracks). Honestly, I think this company would be worth at least 10 times corporate level EBITDA to a buyer, because “track level” EBITDA here is a lot higher. Until you unpack past financial statements, it’s very easy not to see how much free cash flow has been generated year in and year out by Dover. That’s because everything this company has done other than Dover has been a money loser for a very long time. So, everything from the performance of the stock long-term to the dividends you’ve been paid to figures like return on equity – even all the way up to the EBITDA line (the other tracks were EBITDA negative) are messy at the corporate level in a way that disguises the fact that if JUST the Dover track had been all that was publicly traded for the last 25 years or so, this stock wouldn’t be thought of as quite such a terrible performer. There has always been one good, consistent and free cash flow generative asset (Dover International Speedway) at the core of this company. So, it’s not at all unbelievable to me that someone would pay 10 times corporate level EBITDA for Dover International Speedway on its own (if it was still hosting 2 NASCAR Cup Series races per year). However, what an acquirer might pay may not be a relevant measure here – because Tippie has never agreed to sell the stock. This company has two classes of stock, a poison pill, it doesn’t do Q&As with analysts. For an NYSE listed company – it’s extremely unfriendly to outsiders. So, you shouldn’t expect a sale.
But, if you were one day going to get a bid for the whole company – what might that bid be?
EBITDA has been about $10 million recently. All of that has been from Dover. At 10 times EBITDA that’d be $100 million for 2 NASCAR Cup Series races. That works out to $50 million per race. Nashville could probably be sold for about $20 million in cash receipts after taxes and liabilities and so on. That would be $120 million. This would equate to an offer of about $3.30 a share for the company. I think a bidder would offer at least $3 per share in cash. And yet the stock trades at about a 50% discount to that.
Why?
There are a bunch of factors here. This is now the only publicly traded NASCAR stock left. So, it doesn’t get attention the way it might have when International Speedway and Speedway Motorsports were covered by analysts. The stock has performed abysmally since it went public. That turns some people off. There are reasons for this. It went public during a bubble for NASCAR as a sport and for NASCAR related assets. It has also only slimmed down and restored its financial position in the last 10 years. It looks like the stock has gone nowhere in 10 years or so. The reality is that the company has gotten much, much cheaper – and also, in many ways, much better. It paid off over $40 million in debt. It started paying a dividend (the current annual dividend is 10 cents, which is a 5-6% yield on tangible book value – so, quite a healthy dividend). The biggest factors here are probably: 1) NASCAR’s popularity is at a 20-year low and 2) The controlling shareholder.
What’s wrong with the controlling shareholder?
Well, this company refused to sell out at prices much higher than today’s stock price. It also spun-off and then later tried to re-merge Dover Motorsports and Dover Downs Gaming. Dover Downs has now been sold to an unrelated company. But, the price Dover Motorsports shareholders would’ve gotten for merging with Dover Downs wasn’t going to be good. Having said that, this is what you need to expect with controlling shareholders. The same complaints could be made about the two other, bigger (and usually better liked by investors) NASCAR race promoters. Those families were never going to sell out. But, they were willing to go private at advantageous times and to simplify their investment holdings. For example, NASCAR itself (which is 100% owned by the France family) bought out International Speedway (which was only partially owned by the France family – the rest was held by public shareholders). Investing in NASCAR companies as an outside, minority shareholder is like investing in family controlled media companies. You are investing in a family controlled business. The business will never be sold except when the family wants to sell. And, since public ownership is fragmented – the family has the option of taking you out at a price you don’t like. In fact, that’s even more certain here since this company actually has a poison pill with a 10% threshold. That’s remarkable because the two classes of stock ensure that the chairman has 50% of the votes. There’s little need to restrict anyone else to holding less than 10% of votes when you have more than 50%. And yet this company still did it. There’s also a big ($8 to $10 million) golden parachute here. So, an acquirer would really be paying about $130 million (for example) just to give shareholders $120 million for this company. A $10 million golden parachute on a $60 million stock is a pretty big deal. A poison pill on a company controlled through super voting shares is completely unnecessary. And this company has rejected offers made at many, many times today’s share price. That, more than anything else, is what I would guess has kept the stock performing poorly versus fundamentals and keeps most investors away.
What are these “fundamentals” though? The stock looks somewhat cheap – though not amazingly cheap – when valued on things like P/B, P/E, and EV/EBITDA.
It looks a lot cheaper when you think in terms of free cash flow and where it comes from.
Dover Motorsports gets basically all of its “owner earnings” from two TV broadcasts a year of a NASCAR Cup Series race. The company does other things: it owns Nashville Superspeeday (which hasn’t produced revenue in nearly a decade), it hosts an annual music festival (which accounts for less than 4% of revenue), it has tens of thousands of fans pay for tickets to the event, it gets sponsors for the event, it sells concessions, and it hosts other lower level NASCAR sanctioned events (think minor league games in baseball, the undercard in boxing, etc. for an analogy) and so on. But, really, those things – when they go well – are all just a wash. They cover expenses. But, they don’t generate the free cash flow we see being used to pay dividends and pay down debt and buy back stock and pile up a little cash.
What does?
The TV rights to a NASCAR race are paid out as follows…
Promoter: 65%
Drivers: 25%
NASCAR: 10%
There are 36 NASCAR Cup Series races a year. They don’t get the same TV viewership versus each other or anything like that. But, let’s pretend for a second they do. One hundred divided by 36 equals 2.78. And then 0.65 times 2.78 equals 1.8. So, the stream of “owner earnings” at Dover Motorsports is basically tied to a small (1-2%) royalty on all NASCAR TV rights. That’s really where all the free cash flow comes from here.
NBC and Fox have TV deals with NASCAR that will increase this stream of free cash flow for Dover Motorsports by 3-4% a year in 2020, 2021, 2022, 2023, and 2024. The exact deal is for a 4% a year increase in broadcast revenue more than offset by a 4.3% increase in payments to drivers. The net annual growth in free cash flow from broadcasting will be 3-4% a year.
After that, the deals will be re-negotiated. And that’s the really big question mark for this company. TV ratings for NASCAR races have declined a lot during the 10 years NBC and Fox have been broadcasting the races. However, the broadcast rights to sports have definitely gone up a lot per rating point. There’s no doubt about that. Even if a sport (like the NFL) has sometimes, in some years managed to increase its ratings a bit – the increase in the price paid to broadcast a game has increased way more than the number of likely viewers of that game. So, NASCAR ratings have declined. But, the price paid per rating point has increased.
What is likely to happen when NASCAR broadcast rights come up for renewal in a little under 5 years?
That’s a question I can’t answer yet. I don’t know if the market for sports broadcast rights will be as good in 2024 as it is now. And I don’t know if NASCAR’s popularity will be as low. There can be cyclical factors at play in both things. Eventually, cable channels will pay too much for TV rights to sports and a bubble will form. And, eventually, many sports that lose some popularity relative to other sports over 10 or 20 years do regain some. A few don’t. And that may be the other reason this stock is not so popular. If it had all of the same economics it has now but free cash flow came from an NFL, NBA, or MLB based broadcasting rights stream of cash flows – investors might like it better.
Buying this stock is a bet on the durability of NASCAR.
It’s also a bet on the durability of the company keeping these 2 NASCAR Cup Series dates. How realistic is that?
So, in the future, it’s expected that NASCAR will sanction races on a year-by-year basis. Investors won’t like that. It means that we’ll only know in 2025 that Dover will host a racing date in 2026. And we won’t have any visibility beyond that. There are no contracts here. There is no requirement to keep giving dates to the same promoters and in the same proportions. Furthermore, two companies / families control the vast majority of racing dates each year. Only a very small number of tracks are owned by smaller players like Dover. NASCAR also now owns International Speedway. So, effectively NASCAR owns tracks where it can host things. Why not take dates from independent tracks and move them to NASCAR owned tracks. It’d increase earnings a lot for NASCAR.
As far as I can tell, they haven’t in the past. Of course, NASCAR and International Speedway were only recently merged (though they’ve both been controlled by the France family forever). I can find examples of tracks losing races – Dover is going to lose a race to Nashville next year. But, I can’t find past examples of well-capitalized, legitimate, etc. promoters who weren’t involved in some sort of problems that would’ve hurt their chances of promoting successfully having a racing date yanked from them. For those who know NASCAR, let me know of historical examples where a promoter who had been hosting a race for many years didn’t get re-sanctioned despite lobbying for it. I’d be very interested in knowing when this happened, to whom, and why NASCAR took the race away from them. Dover Motorsports has had 2 top level NASCAR racing weekends a year for about half a century. It wasn’t able to win more even when it owned a lot more tracks. It wasn’t able to win one for Nashville even when it purpose built that track and lobbied for it. And yet it was now able to move one of its two dates to Nashville instead of Dover.
These two questions of durability – of NASCAR and of having the same number of races awarded to a promoter every year – would account for big differences in appraisal of the company. If you put aside the controlling shareholder here and just look at the stream of free cash flow – it’s potentially a very, very valuable and very, very high quality stream. But, it’s also potentially not. Some people will believe it’s actually at high risk of declining or disappearing entirely if they don’t trust NASCAR to keep sanctioning the same races for the same promoters regardless of conflicts of interest. And some people will believe this is not a high quality stream of cash flows if they believe that NASCAR is in terminal decline in terms of popularity in a way sports like baseball, basketball, and football aren’t.
So, a good understanding of NASCAR is critical to evaluating Dover Motorsports. And very, very few investors have a good understanding of NASCAR.
That makes this one outside of most people’s circle of competence.
It may make it outside my circle of competence. But, I’ll try to keep learning about NASCAR generally and Dover specifically and see if I can come to a firmer conclusion on this one.
Geoff’s initial interest: 70%
Geoff’s re-visit price: $1.10/share