Analyst Debate: Is Manchester United a Top Stock?
Aug 28th 2012 1:01PM
Updated Aug 28th 2012 1:02PM
The Motley Fool has been making successful stock picks for many years, but we Fools don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.
In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Manchester United (NYS: MANU) , the English soccer club.
Manchester United by the numbers
Here's a quick snapshot of the company's most important numbers:
|Fiscal 2011 Revenue||$522.9 million|
|Fiscal 2011 Profit From Continuing Operations||$20.5 million|
|Market Cap||$3.5 billion|
|Cash and Cash Equivalents||$110.5 million|
|Borrowings Outstanding||$689.5 million|
|Stadium Capacity||75,765 (sold out since 1997-1998 season)|
|Key Competitors||Everton, Manchester City, Chelsea|
Source: Company F-1 filing. Most recent available figures.
Manchester's loss to Everton last week may highlight the very reason that this soccer club is such a terrible investment. Fans have accused the company of skimping on talent after the Glazers acquired the club and piled on nearly $700 million of debt, draining finances from potential player spending by spending more than $75 million on finance costs this year alone. As a result, the team has not performed well lately, and fans are restless, forcing the company to appease them by spending yet more money.
In general, sports clubs are not cash cows, because the competitive nature of the sport requires that as much money as possible be spent on players. If you make a profit, players want a piece of the pie. If you lose, fans want you to spend on players. It's a downward profit spiral, and that's why the company was only able to generate $20.5 million in profit from $522.9 million in revenue last year.
The numbers aren't expected to get much better, either. Revenue is expected to decline 3% to 5% this year, primarily because the company didn't reach knockout stages of the Champions League last season (skimping on players hurts revenue, too). Operating profit is expected to be up between 62% and 77%, but after paying $37.9 million to Arsenal Football Club for Robin Van Persie and then signing him to a $314,000 per-week salary, I'm sure that profit will take a hit next year.
Even if Manchester makes $50 million in profit per year, the stock's P/E multiple would be around 70 -- an absurd number for a club that has declining revenue.
The comparison to other public companies is also tough. The Madison Square Garden Company (NAS: MSG) has nearly a $3 billion market cap, but it owns not only the Knicks but also several other teams as well as Madison Square Garden, the Chicago Theater, and other theaters and entertainment production properties. With a more diverse revenue stream that is double what Manchester United generates and far more profit, why should this U.S. icon trade at a lower multiple than Man U?
This stock is an easy underperform call, and I would be surprised if it lasts more than a few years on the market. The Boston Celtics and Cleveland Indians didn't last long as public clubs, and I think once Manchester misses profit targets a few times, the stock will get crushed, and someone will take it private again.
On a bit of a side note, Manchester United, a team that has been around since 1878, touted its designation as an "emerging growth company" as defined by the JOBS Act and may take full advantage of the "reduced reporting burdens" in the future. I'm not sure this was the intention of the bill as it went through Congress.
A quick search of the "most valuable sports teams" yields some interesting results. Man U leads the pack on the latest Forbes rankings with an implied valuation of $2.23 billion. Its current "B" share market cap is actually below that mark, so maybe Forbes isn't pegging the club at too high a price. Ten years ago, according to the same source, Man U was worth $466 million. This implies that Man U's annualized growth rate over the past decade has been 17%.
Let's put that in perspective. Altria's (NYS: MO) annualized 10-year growth rate is 18.1%. Disney's (NYS: DIS) is 12.6%. Procter & Gamble's 10-year annualized growth rate is a comparatively tepid 6.6%. Altria has been as good an investment (for its owners, anyway) as America's biggest tobacco company, and better than the Mighty Ducks and Anaheim Angels were for former owner Disney, despite Disney's widely diversified set of assets.
Sports teams have jumped in value every time they've been sold. Just look at the Los Angeles Dodgers, which sold for $2 billion earlier this year despite owner Frank McCourt's well-known dire financial straits. McCourt bought the team in 2004 for $430 million, so he made an annual return of 21.2% on his investment.
Travis points out that Madison Square Garden rakes in more profit, but the company's P/E is actually higher at the moment than Man U's. However, there is big reason -- well-covered on the flip side by both Travis and Sean -- why it deserves that premium valuation: It has no debt! Carrying around $730 million in debt is likely to hinder Man U's profitability, but it probably won't scare off any buyers. The Dodgers, after all, had $580 million in debt at the time of their sale.
The only question is when those buyers might start sniffing. As long as there are sports teams, there will be inordinately rich people willing to buy them. Man U is at the absolute top of the global sports heap, and the public flops of the Boston Celtics and Cleveland Indians aren't truly comparable. Boston went public near the height of its popularity and has since seen its franchise value languish due to inconsistent performances in the ensuing years. Cleveland...well, it's Cleveland. The only reason most people buy sports teams in Cleveland is to ship them somewhere else.
I'm not willing to place a long-term outperform call on Man U just yet, but I don't fully buy into the notion that it will be a total bomb. Once public chatter subsides and we get a clearer view of what the Glazers plan for the team's future, we might see some solid gains. Let's wait until season's end to see where the team stands, and then we might come back to a better deal.
What the heck is wrong with the IPO landscape since May? First, we had to deal with a botched Facebook (NYS: FB) IPO that left investors and institutions standing hand in hand for hours -- and, in some cases, days -- wondering if their orders had been executed. Since then, Facebook shares have lost half of their value. Recently, we were graced with the debut of Outback Steakhouse owner Bloomin' Brands, which I dubbed the worst IPO of 2012, given its debt load of about $2 billion. And now we have what I see as another toxic issue in Manchester United.
As Travis has highlighted above, sports clubs haven't exactly had a rich history of delivering for shareholders. Unless you're the New York Yankees, the odds that you can pay athletes with big egos even bigger salaries and remain healthfully profitable are incredibly slim.
At the heart of the problem is the corporate structure, which is designed to serve only the owning Glazer family and do practically nothing for shareholders. The club, which boasted $671 million in debt at the time of its F-1 prospectus filing, had planned to use some of the proceeds from its stock sale to pay down its debt. Instead, the Glazer family chose to float just 10% of the company, of which only a 5% stake was sold on the open market, and generated a mere $220 million -- far from what the IPO had been hoped to generate. Of this $220 million, the Glazers pocketed $110 million, leaving a paltry $110 million left to pay down debt that's accruing interest at 8.75% annually! Ultimately, the IPO is only saving Man U about $10 million in interest annually.
And don't even get me started on the class structure of the company. The Glazers own the vast majority of Manchester United's "B" shares, which come with 10 times as many votes as the "A" shares that common investors like you and I could buy. Did I also mention that "A" shares don't get a dividend, while "B" shares do?
Perhaps the lone bright spot for Manchester United was George Soros' 3.1 million share stake in Man U's class "A" stock. Soros has a pretty impeccable track record, but even one of the richest people in the world can let his love for a sport cloud his judgment on occasion.
To echo everyone else, there's absolutely no justifiable reason that Manchester United should be valued as highly as it is now, and there's little reason to trust a company that will hide the meat and potatoes of its financial statements under the premise of the JOBS Act. This stock is far too cheeky for my tastes, and I absolutely expect it to underperform going forward.
The final call
It's not quite a unanimous underperform call, but we don't have to twist Alex's arm too hard to agree on a thumbs-down on this stock.
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The article Analyst Debate: Is Manchester United a Top Stock? originally appeared on Fool.com.Fool contributors Travis Hoium, Alex Planes, and Sean Williams do not have positions in any companies mentioned. You can follow Travis on Twitter at @FlushDrawFool, Sean at @TMFUltraLong, and Alex at @TMFBiggles.The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services have recommended buying shares of Walt Disney and Facebook. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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