Major Conflict of Interest at Dover Motorsports

In November, I wrote about Dover Motorsports and described it as an interesting investment opportunity despite the poor performance of the Company's management. If you did not have a chance to read it, you can access it by going to the following link:

http://classicvalueinvestors.blogspot.com/2009/11/dover-motorsports-dvd_4409.html

When I posted this report on the Internet, I had no idea it would create so much interest from the shareholders of Dover Motorsports. The next day, I received numerous e-mails and phone calls from angry investors who were fed up with the management. The amount of money that these shareholders lost is significant. At first, I wasn't going to do anything because I bought the stock of Dover Motorsports at less than $2 per share, which means I will probably make money no matter what the management does. I just don't think they can destroy this company any further.

Then I saw a press release announcing that the University of Iowa is going to award Henry Tippie, chairman of Dover Motorsports, an honorary doctorate during the commencement ceremonies on Saturday, December 19, 2009. Tippie lost hundreds of millions of dollars for Dover Motorsports' shareholders, and now, he is getting an honorary doctorate. This is an insult to the shareholders of Dover Motorsports, and the University of Iowa should be embarrassed to be giving him an honorary doctorate. Does this mean that our universities only care about donations? What is the price that one has to pay to receive an honorary doctorate? Are we teaching our students that donations can buy us anything? The press release stated:

"Henry Tippie is a man of humble demeanor but extraordinary achievement, and he is a role model for University of Iowa students. He has built his businesses the right way, with hard work and ethical considerations always foremost."

Source: http://tippie.uiowa.edu/news/story.cfm?id=2248

Maybe Tippie built his businesses the right way, with hard work and ethical considerations, but he is not currently running Dover Motorsports the right way and with ethical considerations. He ignores shareholders and destroys the shareholders' value. Refer to my analysis on Dover Motorsport for these details. I don't believe that he is an appropriate role model for University of Iowa students.

Tippie is also involved with other public companies such as Rollins, Inc. (ROL), RPC, Inc. (RES), Marine Products (MPX), and Dover Downs Entertainment (DDE). Based on the earnings per share growth and the return on equity, these companies are not run as poorly as Dover Motorsports. But if I were a shareholder of any of these companies, I don't think I would want to own a piece of these businesses knowing that Tippie has any involvement. The only reason why I own Dover Motorsports is because I don't think the management can perform any worse than they already have. This is the only company I am aware of that even if it went bankrupt, shareholders would still double or triple their money from today's prices because the assets could be auctioned off for a high enough price to pay off the lenders and reward shareholders handsomely with whatever remains.

So how can Tippie get away with this? It took me some time to investigate the answer to this question. There is a serious conflict of interest at Dover Motorsports. Tippie is one of the trustees of RMT Trust, the largest shareholder of Dover Motorsports. The other two trustees are R. Randall Rollins and Michele M. Rollins. Because Randall and Michele granted all of the voting power to Tippie, he has full control over shares held by the RMT Trust. As a trustee, he has a fiduciary responsibility to the beneficiaries of the trust; in this case, Michele is not only one of the trustees but is also the beneficiary. As a responsible trustee, Tippie should care about the performance of Dover Motorsports because RMT Trust is its largest shareholder. If the company does not act in the best interest of the shareholders, he should either sell the stock or apply pressure to the management and the board of directors to improve their performance and start realizing that they work for the shareholders. However, because Tippie also serves as the chairman of Dover Motorsports' board of directors, this does not happen. He controls over 50 percent of the voting power in the company. Of course he is not going to pressure himself to change his own performance. Instead, he keeps running Dover Motorsports into the ground by making bad acquisitions, keeping unprofitable racetracks that drain the company's financial resources, and refusing to sell the company to one of its competitors who would pay premium prices for its assets.

Under normal circumstances, it would be logical to assume that Randall and Michele would stand up to Tippie and confront his poor performance. According to the will that made Michele the beneficiary of the RMT Trust, she has the power to require the trustee to convert any non-income producing property into income producing property. Because Dover Motorsports does not pay dividends anymore, it is considered a non-income producing property. It could be converted into an income producing property if it was sold. However, standing up to Tippie is not that simple. By reading the book, Hanging the Moon: The Rollins Rise to Riches, by Drury L. Pifer, it is evident that the Rollins would probably not be where they are today had it not been for Tippie. The Rollins brothers, John and Wayne, created a fortune for the family. Michele is John's third wife and Randall is Wayne's son. The brothers were involved in many different businesses, and they were very successful, but their problem was that they kept poor accounting records. This is not unusual among entrepreneurs. They had no idea how much money was coming in and how much was going out, which was a recipe for disaster. To solve their accounting deficiencies, they hired Tippie. Pifer said,

"Now the three men began to function as three forces, each one driving as well as balancing the other two. … Wayne might be viewed as the genius of business, Henry as the civilizing force of government, and John as the creative power that brings the dead to life. In any case, they operated as a system of checks and balances. The success of their collective creation depended on that."

In 1971, Tippie moved his family to Austin, Texas. By 1974, the Rollins brothers, without the third leg of the stool, nearly went bankrupt. Once again, they reached out to Tippie to rescue them. Before Tippie agreed to help them, he spelled out his terms. He asked for full control and power to make whatever decisions he felt were necessary. Pifer quoted him saying, "I was not going to get involved if I'd be second guessed." He eliminated the directors that he felt were not useful and cut costs left and right by firing executives and other employees he considered to be "fat." In the end, he turned those businesses around.

After the death of the two brothers, the Rollins family inherited their wealth while Tippie remained in control. Randall and Michele are so indebted to him that they must risk allowing him to destroy Dover Motorsports. The question is how far does Tippie need to go before they say anything? Does he have to destroy Rollins, Inc. (ROL), RPC, Inc. (RES), Marine Products (MPX), and Dover Downs Entertainment (DDE) before they stand up to him? I am not sure. This is something that only they can answer. With the exception of Rollins Inc., the stock prices of these companies, which are the ultimate measure of long-term success, do not look favorable.

I just cannot believe that Tippie was able to fix all of these problems and is now destroying Dover Motorsports. However, I think there is more to this picture. One time, Warren Buffett said that newspapers, such as the New York Times, are valued more than just on cash flow. Aside from financial rewards, these owners benefit from an enhanced status in society. The same concept applies to professional sports teams and this is no different with NASCAR. Because Dover Motorsports hosts two Sprint Cup races, this allows Tippie to go to two races a year where he can feel important shaking hands of the movers and shakers of major corporations who are involved in various sponsorship programs.

Angry shareholders of Dover Motorsports are asking for the company to sell itself to one of its competitors. I am not sure if Tippie will do what is right for shareholders or what is right for his ego. Time will tell.

Disclosure: Long DVD. No position in ROL, RES, MPX, and DDE.

International Speedway Corporation – NASCAR’s best

Company's Business

Have you ever heard of the Daytona 500? You probably have because it is the "Super Bowl" of NASCAR sporting events. While every driver dreams of winning this event, I dream of owning it. Can you imagine collecting the income stream from hundreds of thousands of people paying for admissions, hot dogs, and the most overpriced American beverage – beer? But that's not all. If you owned the Daytona 500, you would also receive income from television media rights fees, corporate sponsorship, advertising, royalties from licenses of trademarks, track rentals, and merchandise sales. As you can probably imagine, this is "big money." Even if you could afford to buy the Daytona 500, the current owners would not likely sell it to you because they know its value. But you might say, "Everything is for sale for the right price." I agree. But the right price would most likely be right for the current owners and too high for you. But in the stock market, it is a different story. Since shareholders often do not really act like real owners, but more like day traders, they get shortsighted, which allows you to scoop up fabulous businesses at pretty good prices.

International Speedway Corporation is an example of a fabulous company, and it owns and operates 13 of the nation's major motorsports entertainment facilities, including the home of the Daytona 500 – Daytona International Speedway. Other famous facilities include Talladega Superspeedway, Richmond International Raceway, and Darlington Raceway. At all of these facilities, the company promotes over 100 stock car, open wheel, sports car, truck, motorcycle and other racing events. The most prestigious is the Sprint Cup series which includes a total of 38 races; 21 of these belong to International Speedway Corporation.

NASCAR's Origins

To understand International Speedway Corporation, it is necessary to understand the history of NASCAR. Stock car racing was born in the South on the roads of the Appalachian Mountains. For years, farmers in the mountains made their own whiskey, and during Prohibition in 1919, they sold their product to residents of local towns. By 1933, the government repealed Prohibition, but this did not reduce the demand for whiskey because people turned to alcohol during the Great Depression.

During the Great Depression, the government needed revenue to fund the New Deal programs so it pursued farmers involved in illegal alcohol production by sending federal revenue agents to the Appalachian Mountains to stop their illegal activities. As a result, farmers conducted their entire business, including the transportation of alcohol, at night. This is where the term "moonshiner" comes from.

Drivers constantly worked on their cars to make them faster and more reliable to be able to escape the federal revenue agents who chased them. After a while, some of these drivers and their cars started to attract a following. They bragged about their cars' performance and their driving abilities. Eventually, someone constructed a quarter-mile dirt track in the middle of a farm, and stock car racing was born. As more people started showing up to watch moonshiners race each other, the farmer fenced the track and charged admission. Over time, more and more drivers came because part of that admission was paid out as prize money.

NASCAR racing would probably not be what it is today had it not been for William Henry Getty France whose nickname was "Big Bill." As a young man, he was a race car driver from Washington, D.C. Because he disliked cold weather, he decided to move his family to Miami, Florida. During the move, they stopped in Daytona Beach and realized they did not need to continue all the way to Miami. He opened a gas station and soon his business became a hangout place for race car drivers and mechanics.

To attract visitors, Daytona Beach held two races in 1936 and 1937. However, both of them were poorly run and, as a result, they were financial losers. Because France was very well liked in the community, the Daytona Beach Chamber of Commerce told him that there would be no more races unless he was the organizer. France agreed and started his promotional activities. The race took place on July 4, 1938, and it was a great success with 4,500 spectators attending.

Buoyed by his success in Daytona, France wanted to organize another race in Charlotte, North Carolina, after he learned that an oval dirt track was for rent. The media was reluctant to cover the race because it did not have any official sanctioning body. France contacted the Automobile Association of American (AAA), but he was turned down. So he decided to organize his own sanctioning body – The National Championship Stock Car Circuit (NCSCC).

He was not pleased that the business of racing did not have a good reputation. Track owners promised certain purses to the drivers and on numerous occasions did not deliver on these promises. The entire business of racing was disorganized and unethical. On February 15, 1948, France incorporated The National Association for Stock Car Auto Racing (NASCAR). The purpose of this organization was "to unite all stock car racing under one set of rules; to set up a benevolent fund and a national point standing whereby only one stock car driver would be crowned National Champion."

NASCAR guaranteed the purses for the races it sanctioned. In order to hold a NASCAR race, track owners were required to deposit purse money with NASCAR before the race. This was instrumental because it earned drivers' respect. NASCAR also created a national point system where drivers earned points depending on their placements and the driver with the most number of points was crowned the champion. This was very important because it motivated drivers to show up to all the races so that they would not lose points. Even today, this rule is instrumental because fans go to see their favorite drivers. The point system ensures that drivers show up and do not leave their fans disappointed.

Today, NASCAR is owned by the France family. When the organization was incorporated, four people invested in it including Bill France. Over the years, the France family bought out the other three partners.

The NASCAR Business and its Industry

Because the NASCAR organization is not a publicly traded company, investors can only indirectly benefit from it by owning related companies such as International Speedway Corporation. Track owners have three primary revenue providers: race fans, sponsors, and television networks.

NASCAR race fans are probably more loyal and fanatic about their sport than fans of any other sport. It is not uncommon to see them tattooing the faces of their favorite drivers on their bodies. Most of them attend one to two races per year and travel on average six hours to attend them. What is so different about these fans is that they are extremely aware of the different sponsors supporting the sport. If you ask most fans about the main sponsors of their favorite drivers, they will be able tell you their names without hesitation. In fact, they actually look down on drivers without sponsors. Not only are they aware of these sponsors, they also actively buy their products or services. They know that in order for NASCAR to survive, it needs sponsors, so they support the sponsors who support their favorite sport by voting with their wallets.

Sponsors are very happy to reach the captive audience at the stands and on TV screens. But it wasn't always like this. Unlike basketball or baseball, stock car racing is an expensive sport. In the past, drivers and teams struggled financially. They barely had enough money for replacement parts just to keep going from one race to another. The prize money was not enough to cover these expenses. In 1972, R. J. Reynolds Tobacco Company became the sport's primary sponsor because it was prohibited from advertising cigarettes on television. It was looking for other ways to advertise its cigarettes and found NASCAR. This gave birth to corporate sponsorship in NASCAR, which was a new form of marketing. The difference between sponsorship and advertising may not seem obvious, but advertising creates quick results without long-lasting effects while sponsorship creates a bond between the customer and the company and lasts longer than advertising. This is a win-win situation for everybody. Sponsors want their brands to gain greater exposure, so they make it possible for race teams to afford expensive equipment. Drivers return the favor by constantly talking about their sponsors to their fans. Fans go to the stores and buy their products because they know that without sponsors, ticket prices would be much higher.

You might think that television networks jumped on the idea of broadcasting the race to millions of fans around this time, but it wasn't until 1979. This was the first year that the Daytona 500 was broadcasted live. There were doubts whether such a move would be successful. NASCAR was a sport from the South and it was not certain that it would be well-received by other parts of the country. To everyone's surprise, the 1979 Daytona 500 live broadcast was an incredible success with 15 million viewers. This created headlines all over the country. Now NASCAR was being exposed not only to thousands of people, but to millions.

The media found a goldmine in NASCAR as racing became the second most-watched sport in America after football. Why did NASCAR become so successful in comparison to other sports? When you watch football, basketball, or baseball, you have to wait the entire season to watch the best teams play each other. In NASCAR, you get to watch the best drivers race each other every time there is a race. This is exciting. Another reason for the success is the limited schedule. There are only so many weeks in the year and NASCAR's Sprint Cup races 38 weekends in a year. The open weekends are used to reschedule events that are canceled due to weather. If you miss a race, you might have to wait a week or two for another one. In other sports, you are overwhelmed with the number of games that you can watch.

Moat

A moat is what gives a company an advantage over its competitors. It keeps competitors at bay so that a company can keep generating profits and grow over time. The two companies that dominate the NASCAR racing scene are the International Speedway Corporation (ISCA) and Speedway Motorsports (TRK). International Speedway Corporation owns 13 racetracks which constitutes half of all the tracks in the nation. Speedway Motorsports owns seven racetracks.

A competitor could technically build a state-of-the-art racetrack, but it wouldn't be worth much until the track could get a Sprint Cup race. Non-Sprint Cup races would not bring enough fans and broadcasting rights to make such a project financially feasible. It costs over $100 million to build a racetrack.

NASCAR determines every year which track gets what race. Because fans and drivers are used to having certain races at certain tracks, NASCAR tends to keep races at the same locations for years. But from the point of view of a track owner, NASCAR's power to revoke a race possesses a certain risk. If for some reason NASCAR decided to move the Daytona 500 from the facility owned by International Speedway Corporation to another facility owned by a competitor, this would result in a tremendous loss for the company and it would most definitely be reflected in a falling stock price. This, however, is unlikely to ever happen because International Speedway Corporation is controlled by the France family which also owns and controls NASCAR. The France family is unlikely to take races away from their own tracks.

It is evident that International Speedway Corporation enjoys a wide moat that serves a tremendous barrier to entry to another competitor.

Management

International Speedway Corporation is controlled by the France family who owns 40 percent of the shares and controls 68 percent of voting power. In 1992, Bill France passed away and his son William Clifton France (also known as Bill, Jr.) took over. There was some concern whether he would do a good enough job running NASCAR and International Speedway Corporation. Under his leadership, NASCAR exploded. He really put International Speedway Corporation on the map as a big business. Bill Sr. saw NASCAR as a sport, and Bill Jr. saw it as a product. Bill Jr.'s children, Brian and Lesa had an even greater vision for NASCAR because they saw it not just as a product, but as entertainment that could attract not only men, but also families with children. Today, women constitute 40 percent of NASCAR's fan base.

By owning such a significant portion of the company, the France family's interests are aligned with the interests of shareholders.

Analysis

Bill France founded International Speedway Corporation in 1953, but back then it was under a different name – Bill France Racing, Inc. In 1957, he renamed it Daytona International Speedway Corporation and, as the name implies, the company only had one track. When it acquired Talladega Superspeedway in 1968, the name of the company changed to what it is today. Over the years, the company strategically acquired different racetracks. Today, the company owns the majority of racing's prime real estate.

On November 4, 1996, the company went public at $20 per share. Today, it can be purchased for about $26 per share. It has been 13 years and the stock only appreciated $6 per share. The company must not have grown very much since then, right? Well, let's take a look at a chart comparing 1996 and 2008.

	1996	2008	Change
Number of Racetracks	4	13	225.0%
Total Revenues	$97,996,000	$787,254,000	703.4%
Net Income	$18,834,000	$134,595,000	614.6%
Earnings per Share	$0.54	$2.80	418.5%
Book Value per Share	$3.10	$23.43	655.8%

It can be seen that the number of tracks increased by 225 percent, which pales in comparison to the performance of the other metrics. Revenues increased 703.4 percent, net income by 614.6 percent, earnings per share by 418.5 percent, and book value per share by 655.8 percent. Despite these increases, the stock is trading only 30 percent higher than what it was in 1996. Isn't this just ridiculous? I think it is. You might say that in 1996, the stock was overpriced because it had a P/E ratio of 37. If we use a P/E ratio of 20 instead, the stock would have had a price of $11 per share. Comparing it to $26 per share, this would be an increase of 136 percent. Either way, I still cannot believe that investors have the opportunity to buy this company for $26 per share.

How could the company only increase the number of tracks by 225 percent and increase other metrics by 418 to 703 percent? As mentioned before, the company has three sources of revenues: race fans, sponsors, and television networks. The company not only increased revenues from race fans by increasing the prices of tickets, concessions, and parking, etc., but also by adding seating capacity at its racing facilities. Since the demand from race fans was so strong over the last decade, the company was barely able to keep up with all of the ongoing expansion projects.

The company also increased revenues from sponsorships. This type of revenue growth is cheap in comparison to capacity expansion. This is because the company does not have to build anything from concrete to add more sponsors. NASCAR sponsorship was created in 1972 and kept growing because as more people became saturated with advertising, sponsorships allowed companies to sneak in their marketing message to race fans without being totally explicit about their marketing.

Revenues from television broadcasting rights also grew much faster than the number of tracks that International Speedway Corporation owns. Similarly to sponsorship dollars, broadcasting rights revenues can grow without much capital. Since there is only one NASCAR, television networks are fighting over the rights to broadcast the event in order to attract viewers. From the point of view of NASCAR and International Speedway Corporation, it is a good place to be. These revenues are likely to keep going up.

What is even more ridiculous about the current stock price is that the comparison chart between 1996 and 2008 does not include the full impact of television rights that NASCAR negotiated for the eight-year period from 2007 and 2014. In 2007, NASCAR entered into an eight-year contract with FOX, ABC/ESPN, TNT and SPEED for the broadcasting rights for three national touring series – Sprint Cup, Nationwide, and Craftsman Truck. The agreement is for $4.5 billion over the eight-year period. This equates to $560 million average per year for the entire industry, which is 40 percent higher than the last contract for $400 million per year. The contract also contains annual increases of about 3 percent per year. This income stream provides stability and predictability. It is particularly important to all the companies in the industry when race attendance is down. This income is also easy because it doesn't require any work. It is like saying to the television networks, "I am running a number of race events. Bring your cameras and do what you need to do to expose my sport. After you are done, take your stuff, come back next year, and don't forget to write me a check for half a billion dollars. Once the contract is up in 2014, we will probably jack up the price because we are pretty sure that NASCAR will be even more popular and advertisers on your television networks will be fighting each other to get a chance to have a 30-second commercial exposed to NASCAR fans."

However, International Speedway Corporation is not getting the entire $560 million because this is for all the companies in the industry. In 2008, the company received $257 million and only $189 million went straight into operating income. The reason why the entire $257 million wasn't retained was because about 25 percent goes to the drivers. Still, the operating margins on the television rights are about 73.5 percent. Based on the current stock price, the company is trading for a market capitalization of $1.3 billion. If you just take the television rights at $189 million and place a conservative multiple between 6 and 8, the value of these television rights is between $1.1 and $1.5 billion. In other words, the television rights on its own are worth as much as the entire company. By purchasing it at $26 per share or $1.3 billion of market capitalization, you are paying for the television rights and getting all the racetracks and sponsorship dollars for free.

Why is International Speedway Corporation's stock so cheap?

As mentioned before, track owners have three primary revenue providers: race fans, sponsors, and television networks. It costs about $50 to $100 for an admission ticket, but if the hotel, travel, food and everything else is included, it is not unreasonable to say that it costs approximately $1,000 per person to attend a race. Since most fans attend one to two races per year, this equals to an annual expenditure of $1,000 to $2,000 which comes from discretionary income. Half of NASCAR's fans earn $50,000 or less annually. The current recession definitely has negative effects on their attendance, but this happens because fans are less able to afford it and not because they dislike the sport. I believe that this is only temporary for as long as the economy stays weak.

Sponsors that are seeing the attendance down and their own businesses struggling from the effects of the recession are cutting down on their marketing budgets. Some of them might not be able to afford sponsorship and others might be cutting expenses to protect their stock prices. For whatever reason they are pulling back, I believe this also is temporary. In the end, there is only one NASCAR. If they want to advertise in a newspaper, they have plenty of choices, but if they want to reach NASCAR fans, they can only do so through NASCAR or racetrack owners. Sponsors will be back because if they don't, there will always be someone who will want to reach NASCAR's fans even if it means that it will be foreign companies. NASCAR has a toll bridge and whoever wants to drive through has to pay up. It is that simple.

When the top line revenue declines, expenses stay relatively stable because the majority of them are fixed. The expenses include sanctioning fees to NASCAR, prize money to drivers, and other operational costs. The track owners have to pay a NASCAR sanctioning fee and drivers' prize money no matter how many people show up to the race. The costs that are variable are the operating costs such as the number of employees during the race. Track owners usually hire one employee for every 75 race fans and this expense can obviously be reduced as fewer fans show up. The good news is that when the recession ends, the top line will recover, the bottom line will grow much faster.

Valuation

I believe that the normalized earnings power of International Speedway Corporation is about $3 per share. For a company of this caliber, I have estimated an earnings multiple between 15 and 20. Based on this, the stock is worth between $45 and $60 per share. The average is $52.50 per share.

On Yahoo finance, you might notice that earnings per share are $0.65 which means that the P/E ratio is about 40. This is misleading because the earnings per share listed includes a non-cash equity impairment charge in the second quarter of 2009 for $57 million or $1.18 per share. This impairment charge is a one-time hit against earnings. Without this charge, earnings per share would have been much higher and the P/E ratio much lower.

Conclusion

Wall Street, with its short-term mentality, is giving this company away for about 50 cents on the dollar because it is unable to see past the current weaknesses in the company's earnings. This is why recessions produce investment opportunities because they make investors do unwise things such as selling wonderful businesses at cheap prices. But the key here is patience, which is always in short supply on Wall Street. NASCAR is not going anywhere and owning International Speedway Corporation is the best way to benefit from this sport. The time will come when this company will shine again, and when it does, Wall Street will pay us a price much higher than what is it is today because it will see all the positive things about this company that now it refuses to acknowledge.

 

Disclosure:

I, or persons whose accounts I manage, own shares of International Speedway Corporation at the time of this report. This report is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors, LLC, is responsible for any losses resulting from purchasing shares of International Speedway Corporation. You are advised to consult your financial advisor or conduct the due diligence yourself.

Dover Motorsports - DVD

Dover Motorsports is an interesting investment opportunity. I stumbled upon it while writing a report about International Speedway Corporation for my clients. Please refer to my report on International Speedway Corporation for background on NASCAR and the racing industry.

Dover Motorsports promotes NASCAR races. It owns four motorsports tracks which include Dover International Speedway in Dover, Delaware; Gateway International Raceway near St. Louis, Missouri; Memphis Motorsports Park in Memphis (recently shut down), Tennessee; and Nashville Superspeedway near Nashville, Tennessee. It generates revenues from admissions, concessions, television media rights fees, corporate sponsorship, advertising, royalties from licenses of trademarks, track rentals, and merchandise sales.

Unlike its competitor, International Speedway Corporation, Dover Motorsports does not possess any moat that would protect it from its competitors. It is actually at a disadvantage to its competitors. Not only that, the company is run by incompetent managers who did nothing but destroyed shareholders' value over the last decade. In my book, Why Are We So Clueless about the Stock Market?, I stress the importance of investing in companies that possess moats and are run by good managers. Why would I want to invest in a company that lacks these two characteristics? Let me give you some background on this company before I answer this question. The company owns four tracks that are like four separate businesses. Even though the company as a whole has no moat, Dover International Speedway is extremely valuable and does possess a moat which I will describe in more detail later in this report. First, I want to discuss the performance of the current management.

Let's look at some metrics illustrated below.

	2001	2002	2003	2004	2005	2006	2007	2008
Revenues	86,551	93,731	93,626	93,617	90,999	91,274	86,052	84,279
Net Earnings	6,871	-27,195	-22,138	2,440	3,975	35,345	3,744	-5,679
Share holders' equity	244519	160533	137372	138466	113277	74,260	76,116	67,447

Revenues remained mostly flat from 2001 to 2008. Net earnings fluctuated widely, but on average they were negative $9,166. The shareholders' equity was destroyed from $244,519 in 2001 to $67,477 in 2008. The stock price was as high as $8.95 per share on April 10, 2002. Today, it is trading at around $1.80 per share.

How did the management achieve this "fabulous" performance?

On October 3, 1996, the company was taken public by Merrill Lynch under the name Dover Downs. It only had one racetrack, Dover Downs International Speedway. However, racing contributed only 30 percent of the revenues. The other 70 percent came from gambling. In March 2002, the company spun off its gambling division as a separate company – Dower Downs Casino.

Beginning in 1998, the company acquired three Midwest racetracks: Nashville Superspeedway, Gateway International Raceway, and Memphis Motorsports Park. These tracks turned out to be financial losers. Since the company was unable to obtain another Sprint Cup race from NASCAR (which shows just how difficult it is to be awarded additional Sprint Cup races from NASCAR) for one of these facilities, it was never able to operate these facilities with profitability. You might think that the management would finally either sell these assets or shut them down to stop the bleeding, but this was not the case here. The management used the cash flow from profitable operations and kept wasting shareholders' money by keeping unprofitable operations open. As a result, the company had to make impairment charges to assets and goodwill. The list is long. Take a look.

2002 Goodwill Write down	$28,606,000
2003 Goodwill Write down	$13,362,000
2003 Asset Impairment	$2,867,000
2003 Asset Impairment	$4,309,000
2006 Asset Impairment (Gateway)	$37,357,000
2006 Asset Impairment (Memphis)	$7,882,000
2006 Asset Impairment (Nashville)	$16,170,000
2006 Goodwill Impairment (Midwest)	$2,487,000
2008 Asset Impairment (Nashville)	$3,140,000
2008 Asset Impairment (Memphis)	$2,150,000
2008 Asset Impairment (Gateway)	$7,505,000
2009 Asset Impairment (Memphis)	$7,478,000
Total	$133,313,000

The management wrote down over $133 million against income for its mistakes. I understand when a company has to write down one or two mistakes. Even International Speedway Corporation, a competitor, had an impairment charge in 2009. No one is perfect, and even the best managers get it wrong on some acquisitions. But to be wrong on every single one is just mind-boggling. To put this in perspective, the entire market capitalization of this company is $65 million as of the date of this report. The amount of money the management wasted was double the current sale price of the entire company.

You might think that after their failures, the management would acknowledge their mistakes. Again, this was not the case. The managers are in complete denial as demonstrated by a comment made by Denis McGlynn, the company's CEO:

"We're still a successful company here, doing very well. Only because somebody is now comparing us against Speedway Motorsports, which is a megamonolith, and ISC [International Speedway Corporation], do we get criticized. But we are still the same successful company that we were before. So life is not bad here. And we're doing fine."

Source: http://www.scenedaily.com/news/articles/sprintcupseries/Do_Dover_and_Pocono_have_a_future_in_NASCAR.html

Shareholders' Criticism

As you can probably imagine, the shareholders are not too thrilled with the management. Mario D. Cibelli, the managing member of Marathon Partners L.P., has been a major shareholder of Dover Motorsports for approximately seven years. Cibelli has run out of patience and expressed his frustration in the letters to the Dover Motorsports' board of directors. You can access these letters at www.sellthecompany.com. He is pressuring the management to sell the company or liquidate its unprofitable assets.

Cibelli owns 16.3 percent of Dover Motorsports, but controls only 1.3 percent of voting stock. Henry B. Tippie is the Chairman of the Board of Directors and controls in excess of fifty percent of the voting power. This means that he can determine the outcome of anything he wants including the election of directors or other corporate actions. His actions don't seem to illustrate that he cares much about what shareholders want. After repeated complaints from Cibelli and other shareholders, he further aggravated shareholders by eliminating the question and answer session during the company's quarterly conference calls. I guess he grew tired of listening to shareholders' complaints. What is so ironic about Tippie is that he is a CPA, so he should have no problem understanding finance and shareholders' value. The University of Iowa named its business program after him – The Henry B. Tippie College of Business.

In one of the letters, Cibelli included Tippie's comments to students at the Tippie College of Business:

"We're in much faster-moving society today. If you go back to the '30s, '40s or even the 1950s, change was fairly slow in coming. Today, change is much more rapid and you must change with the times. If you don't change, you're going to get 'left at the gate,' so to speak."

It would be nice if Tippie followed his advice with Dover Motorsports and sold the company or closed down its money-draining operations. As Cibelli said, the days of independent racetrack operators are gone. Bigger players, such as International Speedway Corporation or Speedway Motorsports, have more resources and can run individual racetracks much more efficiently than independent owners.

Why Do I Think Dover Motorsports is a Good Investment?

It is obvious that the management is terrible and we cannot count on them to create shareholders' value. Why do I think that Dover Motorsports is a good investment? Because it possesses something extremely valuable in relation to the sale price of the company.

As mentioned before, the company owns four motorsports tracks which are as follows:

• Dover International Speedway in Dover, Delaware
  
• Gateway International Raceway near St. Louis, Missouri
  
• Memphis Motorsports Park in Memphis, Tennessee (recently shut down)
  
• Nashville Superspeedway near Nashville, Tennessee
  

As of December 31, 2008, the company has the following simplified balance sheet. I am using the 2008 figures because more disclosure is provided in comparison to the latest quarter. In any event, the balance sheet is not that much different now from what it was on December 31, 2008.

ASSETS		$155,179,000	LIABILITIES	$87,732,000
Dover International Speedway	$69,651,000
Gateway International Raceway	$10,000,000
Memphis Motorsports	$10,000,000		SHAREHOLDERS' EQUITY	$67,447,000
Nashville Superspeedway	$51,500,000		Equity per Share	$1.88

When acquiring any company, you are taking possession of all the assets and liabilities and their ability to generate future income. By purchasing all of Dover Motorsports, you would be getting over $155 million worth of assets. But just as a single-family home can have an existing mortgage, Dover Motorsports comes with $87.7 million of liabilities. This means your equity would be $67.4 million. How much would you be paying for this equity? Based on the current stock price, the market capitalization is $65 million. If you bought Dover Motorsports, you would be paying $65 million and getting $67.4 million of equity. You would be paying almost exactly what the company is worth. But it gets better. In the above chart, assets are equal to over $155 million and most of that value comes from the four racetracks which are valued at $141,151,000 ($69,651,000 + $10,000,000 + $10,000,000 + $51,500,000).

The problem is that these values are not correct because they follow accounting rules under GAAP (Generally Accepted Accounting Principles) that require properties such as racetracks to be recorded at cost and not market value. You know very well that just because you paid $100,000 for your house, it doesn't mean that this is how much your house is worth today. A house purchased for $100,000 years ago could be worth $300,000 or even more today.

As I mentioned before, Gateway International Raceway, Memphis Motorsports, and Nashville Superspeedway are financial losers. They do not operate profitably and they drag down the profitability of the entire company. Maybe these three facilities are worth what the company's balance sheet indicates, but since they are losing money, I will treat them as if they were worthless.

Dover International Speedway is a diamond. As shown above, it is valued at $69,651,000. This is way too low. Based on my research, this track is worth between $200 and $300 million. I will explain my valuation analysis in the next section. If I create a scenario using these values, we arrive at the following estimate.

ASSETS		$300,000,000	LIABILITIES	$87,732,000
Dover International Speedway	$300,000,000
Gateway International Raceway	$0
Memphis Motorsports	$0		SHAREHOLDERS' EQUITY	$212,268,000
Nashville Superspeedway	$0		Equity per Share	$5.91

In this scenario, I assigned Dover International Speedway a value of $300 million and all the other tracks and assets a value of $0. After subtracting all the liabilities, we are left with shareholders' equity of over $212 million. Remember that we can purchase this company for $65 million. In other words, the shareholders' equity of $212 million is the same as equity per share of $5.91. Today, the stock can be purchased for $1.80 per share. Is this a good deal? I think it is, but let's rerun the numbers more conservatively, assuming that Dover International Speedway is only worth $200 million.

ASSETS		$200,000,000	LIABILITIES	$87,732,000
Dover International Speedway	$200,000,000
Gateway International Raceway	$0
Memphis Motorsports	$0		SHAREHOLDERS' EQUITY	$112,268,000
Nashville Superspeedway	$0		Equity per Share	$3.12

In this case, all the other assets were assigned a value of $0 and Dover International Speedway a value of $200 million. This translates into shareholders' equity of over $112 million or $3.12 per share.

The stock of Dover Motorsports is worth between $3.12 and $5.91 per share. If you buy it at $1.80 per share and the more conservative scenario plays out, you almost double your money, and if the less conservative scenario plays out, you may be able to more than triple your money. The downside is limited because the company's value is backed by hard assets.

Why Do I Think Dover International Speedway is So Valuable?

NASCAR sanctions different types of races but the Sprint Cup series is the major league. This is where you get to see Jeff Gordon and Dale Earnhardt, Jr., race each other. This is where all the money is made by the track owners. Racetracks without Sprint Cup races are not very profitable, if they are profitable at all. Dover Motorsports' three financial losers (Gateway International Raceway, Memphis Motorsports, and Nashville Superspeedway) are examples of tracks without Sprint Cup races.

There are a total of 38 Sprint Cup races and they are allocated in the following way:

International Speedway Corporation	21
Speedway Motorsports	12
Pocono Raceway	2
Indianapolis Motor Speedway	1
Dover Motorsports	2
Total Sprint Cup Races	38

Note: Dover Motorsports holds two Sprint Cup races at one facility – Dover International Speedway.

International Speedway Corporation and Speedway Motorsports control more than 86 percent of Sprint Cup races. They have been acquiring racetracks with Sprint Cup dates for years. These two companies simply dominate the industry. Because of economies of scale, they are able to operate individual racetracks much more efficiently than independent owners. For example, they can offer multi-track sponsoring agreements to major corporations. Individual track owners are at a disadvantage.

NASCAR could add more Sprint Cup races, but the organization wants to limit the supply of these races to make them more valuable. Refer to my previous report on International Speedway Corporation to fully understand the rationale behind this. The bottom line is this: there are only five Sprint Cup races left and Dover Motorsports has two. This is significant particularly because Ponoco Raceway expressed on numerous occasions that their racetrack with two Sprint Cup dates is not for sale. It is family-owned, fully paid off, and intended to be passed onto the owners' grandchildren through trusts that have already been established. Indianapolis Motor Speedway has a long tradition of racing aside from NASCAR's influence. It is highly unlikely the owners will ever sell its facility or the Sprint Cup date. So there are only two Sprint Cups that remain and they belong to Dover Motorsports. This is the last prime racing real estate available that International Speedway Corporation and Speedway Motorsports can get their hands on. There is a really good chance that the management will finally give in and sell because it does not have the luxury of being a private company such as Ponoco Raceway and because it is constantly being pressured to do the right thing for its shareholders.

According to Burton Smith, Chairman and CEO of Speedway Motorsports, Dover International Speedway is for sale. He said that he spoke with Henry B. Tippie of Dover Motorsports and it is all about the price. Tippie does not want to give it away because he knows that Dover International Speedway is the last piece of the industry's consolidation puzzle and Smith does not want to pay too much. But Smith will have to pay up if he wants it. He is a motivated buyer, and here is why.

In December 2008, Smith acquired Kentucky Speedway for an incredibly cheap price of $78 million. He said that it was the best deal he ever made. He bought it from the owners who failed to get a Sprint Cup race and therefore sold him the facility at a cheap price. His goal is to put a Sprint Cup there. Smith knows that without another Sprint Cup date, his purchase is not worth much. He also wants another race for his Las Vegas facility. The only way he can get it is through another racetrack acquisition. Since he needs two additional Sprint Cups, acquiring Dover Motorsports or Ponoco Raceway would solve his predicament. As mentioned before, Ponoco Raceway is not for sale. The current owners said that even if it was for sale, it would be sold to the France family at International Speedway Corporation and not to Smith. Just to illustrate how much he might pay for a racetrack with Sprint Cup dates, it is helpful to go back to 2007 because that's when he paid $340 million in cash for New Hampshire International Speedway which had two Sprint Cup races. This facility had 40,000 fewer seats than Dover International Speedway. This transaction is the best comparable to show what price might be appropriate for Dover International Speedway. But since we are in 2009 and the economy is not as great as it was in 2007, we might have to adjust the price downward. It is not unreasonable to think that Dover International Speedway can be sold on the low end for $200 million and on the high end for $300 million. Who knows, maybe it can even be sold for $400 million. It all depends on how badly Smith wants its two Sprint Cup dates.

But using just one comparable sale to value Dover International Speedway might not be a good idea. Let me use another comparable sale. In 2007, International Speedway Corporation paid $215 million for Chicagoland Speedway in Joliet, IL. This facility had 75,000 seats and only one Sprint Cup race. Dover International Speedway has 135,000 seats and two Sprint Cup races. This sale comparable indicates that my low end estimate, $200 million, of Dover International Speedway is probably too conservative.

Dover International Speedway is a unique one-mile track. Unlike some superspeedways, it offers fans a superior, unobstructed view of the entire track. The speedway surface is not asphalt like the surface of other Sprint Cup tracks; instead, is all concrete. The facility is known for its race called "the Monster Mile." Its mid-Atlantic geographic location is excellent because it serves Philadelphia, New York City, Baltimore and Washington, D.C. The company has had its Sprint Cup date for 40 consecutive years.

It is really hard to predict whether the management will sell the company or not. If it does sell, then the shareholders would benefit greatly from this decision. How much they would benefit depends on the sale price. Smith claims that the company is for sale depending on the price. The management stated that they don't want to sell at the bottom. Even though the company's earnings per share are negative, it is not losing money. The company is cash flow positive, but because of various impairment charges against income, it seems as if it is not profitable. However, those impairment charges are for past mistakes and they do not affect cash flow.

At the current price of $1.80 per share or market capitalization of $65 million, it would not take much for the management to cause the stock price to double from these levels even if they chose not to sell. Based on Cibelli's letters the three unprofitable tracks are losing approximately $6 million per year which means that by simply closing them down, the company could save $6 million per year. By using a multiple of 10, this amount of savings is worth $60 million which would make the company be worth twice as much as what it is selling for today. I believe that there is hope and I am saying this because the company put its Memphis facility up for sale at a price of $10 million. The deal did not close and therefore, the management recently decided to shut it down. This is the first smart move that they have made in a long time.

I think that there is a chance that the management is trying to clean up its act and increase its share price so that when they do decide to sell the company, they are in a position to ask for more money. Since the company is cash flow positive, they are not in a hurry to sell which is good and bad. The good part is that they will not be forced to sell at a cheap price. The bad part is that they might not want to sell at all. What is encouraging is that there are willing buyers for Dover International Speedway and Dover Motorsport's stock. Cibelli already owns almost 3 million shares and recently, he made an offer to buy 8 million shares for $2.35 per share. Tippie purchased $239,928 worth of Dover Motorsports' shares just in November 2009. While he didn't impress shareholders with his capital allocating skills, I think that he's got it right this time by purchasing shares of Dover Motorsports for his personal account at these levels.

Conclusion

Even thought Dover Motorsports does not possess a companywide moat, Dover International Speedway does. This facility on its own is worth more than what the entire company is selling for on the stock market. Although management is incompetent, I believe that the positives far outweigh negatives. The way I feel about this company can be best described by Warren Buffett's words of wisdom:

"I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will."

Disclosure:

I, or persons whose accounts I manage, own shares of Dover Motorsports at the time of this report. This report is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors, LLC, is responsible for any losses resulting from purchasing shares of Dover Motorsports. You are advised to consult your financial advisor or conduct the due diligence yourself.