Into the pits

Deteriorating credit conditions impact consumer choice. As households are squeezed, discretionary items like Speedway Motorsport's (TRK) event tickets are likely to fall off the monthly shopping list. Unsurprisingly, TRK's recent results highlight increasingly difficult conditions.

It has been a volatile period for TRK since our initial buy recommendation. As shown on the daily chart, this has muddled the formation of an ascending triangle pattern, which had previously been pointing to a revival of the underlying upward trend.

This has been in part due to TRK's recent second quarter results, which were simply lacklustre. The company reported an 11.3 percent fall in profits for the quarter due to lower revenues from its broadcasting deal, together with delays and cancellation of several key events. The company says that market conditions were difficult because of high fuel costs, high interest rates and declines in consumer spending.

We see this as a warning signal that conditions are becoming tougher. If TRK says fuel costs were high in the last quarter, no relief is likely anytime soon. And while market pundits are already expecting a Fed rate cut in the next few months, which may provide some short term relief, we believe the long term risk in consumer spending will be an even bigger issue for TRK.

TRK operates in a consumer discretionary sector, which has a particularly precarious exposure in worsening credit conditions. The subprime mortgage meltdown will mean consumers have tougher choices to make.

In addition, the US household's largest asset, the family home, is creating illusionary wealth effects. Indications that housing prices are stagnating means those households will see this source of equity dry up and may have to reallocate spending.

Given a choice of feeding the family and going to car races, we think households would sensibly opt for the former.

Therefore, even though the company has maintained its outlook for the year, we cannot find enough reason to share its optimism. Where conditions may have looked reasonable several months ago when the extent of the US subprime mess was masked, future market conditions now look bleak.

A point of puzzlement also lies in its oil and gas interests. We cannot see the rationale behind a racing venue owner-operator having energy exploration and production activities. Although this business is not contributing to profits in any significant way, we think it is an unwelcome distraction and retaining this business reflects poorly on management.

Even though there are some bright spots for the company, including their multi-year continuing NASCAR broadcasting agreement, which de-risk future revenues to some extent, and the recently announced agreement with Ticketmaster to allow resale of unused tickets, we think the fundamental picture will still prove to be too difficult.

Looking at the charts again, after the stock failed to sustain moves above $40 and the recent increase in volatility, we believe the risks associated with holding this stock have increased substantially. Although the stock currently remains above support provided by the triangle base at $36.08 and the July low of $35.99, the loss of upward momentum indicates a threat of further pressure to these levels in the weeks ahead.

In light of pending tougher market conditions and considering the opportunity costs of continuing to hold this stock, we believe that TRK's risk/reward characteristics are no longer favourable. We consider that the most prudent course of action in this instance is to close the position and move on.

Accordingly, we recommend selling TRK at around $37.59