There are a substantial number of publicly traded sports teams, but do any of them make good investments?
Auto sports
NASCAR
International Speedway Corp. (ISCA, Financial)
Market cap: $1.62 billion
Speedway Motorsports (TRK, Financial)
Market cap: $775 million
There is an old joke along the lines of “How do you make a small fortune in racing? Easy, start with an even bigger fortune!” While the joke is meant to apply to racing teams, it could just as well apply to the two publicly traded NASCAR companies who own the event venues where a majority of the races take place.
The first problem for the track owners is the race venue real estate business is extremely capital intensive. The owners must build and maintain large facilities that are only really useful for one thing: auto sports. There are one or two big, popular races at a track per season. The rest of the year, the owners are faced with attempting to generate revenue from smaller racing events. For example, International Speedway has generated only $80 million in free cash flow over the past few years. A majority of the company’s operating cash flow has been eaten up by capital expenditures.
The second problem for track owners is motorsports are very competitive and there is no monopoly. NASCAR can decide to increase or reduce the number of races and tracks from a season. NASCAR also competes with just about anything and everything when it comes to racing. Competitors include F1, IndyCar, NHRA, drift events, rally racing, touring car racing, endurance racing like Le Mans, local races like dirt track, tractor pulls and monster truck shows, and the list goes on.
On top of the structural issues regarding owning and operating racing venues, there is the problem of declining popularity for NASCAR. It is an American sport that has a very limited global market.
Formula One
Formula One Group (FWONK, Financial)
Market cap: $5.86 billion
Liberty Media recently purchased majority control of Formula One Group, which owns the commercial rights to the Formula One racing series.
Unlike the publicly traded NASCAR companies, Formula One has a lot going for it. First, it is a capital light business as it does not own any of the physical tracks, cars or anything that would require a tremendous amount of capital spending. The asset light nature of the business makes a great investment. Everyone else spends all the money (Ferrari (RACE, Financial) is rumored to spend almost half a billion per year on its F1 racing endeavors), while Formula One reaps a lion’s share of the rewards.
F1 is also a global sport with races held all around the world. The global nature shows it is the most popular racing series with an estimated 24 million fans around the world. Liberty Media’s buyout also means previous head honcho Bernie Ecclestone is out as a day-to-day decision maker (he retains the title chairman emeritus). Ecclestone was never the most popular figure with fans or teams, so the management change should be a boon to the company.
Soccer
Manchester United PLC (MANU, Financial)
Market cap: $2.66 billion
United Kingdom
Fenerbahce Futbol AS (IST:FENER)
Market cap: $1.05 billion
Turkey
Borussia Dortmund NPV (BORUF)
Market cap: $571.32 million
Germany
Juventus F.C. NPV (JVTSF)
Market cap: $463.57 million
Italy
AS Roma SpA (MIL:ASR)
Market cap: $174.18 million
Italy
AFC Ajax NV (AFCJF)
Market cap: $174.17 million
Netherlands
SS Lazio SpA (MIL:SSL)
Market cap: $40.51 million
Italy
At first glance, soccer, or football as the rest of the world calls it, seems like it would make for an appealing investment. It is wildly popular across the globe. Indeed, with over four billion fans it is the most popular sport in the world and its fans are extremely passionate. Historically however, soccer teams have compounded in value at below market average rates. There seem to be two interrelated issues that cause this.
First, there are no real hard salary caps for any of the major soccer leagues around the globe. As a result, players can move from league to league and have incredible leverage over teams. They have dozens of teams in many different countries all potentially bidding for their services. As a result, star soccer players are some of the highest-paid professional athletes in the world. For example, the highest-paid player in 2016, Christiano Ronaldo, earned $53 million in salary and bonuses. As a result of the intense competition for talent, player salaries tend to gobble up the excess profits the team itself might earn. For example, Manchester United in its latest 20-F basically describes just that (emphasis ours).
"Player and staff compensation comprise the majority of our operating costs. Of our total operating costs, player costs, which consist of salaries, bonuses, benefits and national insurance contributions, are the primary component. Compensation to non-player staff, which includes our manager and coaching staff, also accounts for a significant portion. Competition from top clubs in the Premier League and Europe has resulted in increases in player and manager salaries, forcing clubs to spend an increasing amount on player and staff compensation, and we expect this trend to continue. In addition, as our commercial operations grow, we expect our headcount and related expenses to increase as well."
Manchester United spent 45% ($232 million) of its last fiscal year’s revenue of $515 million on employee compensation. This dynamic is unlikely to change despite many discussions about possible salary caps. Soccer is a global sport and each country has its own league. There is no real central governing body that could enact any type of salary cap. What may be legal in one country may not be in another. You would also face technical challenges in implementing any cap as salaries are paid in local currencies and foreign exchange fluctuations would make any type of global cap technically difficult to implement.
The second problem appears to be one of intense competition between teams for fans. While soccer is the most popular sport worldwide, just about every country has its own soccer league and own set of local teams. In North America, there are 30 professional soccer teams vying for fans among the 365 million people that make up the entire population of the U.S. and Canada. In contrast, the English Premier League has 20 teams competing for fans among 65 million locals. Spain has 20 La Liga teams competing for fans among 46 million locals. While there are plenty of fans, there are also plenty of teams to go around.
For investors, the best way to make money off soccer is to become a star player, not buy shares of a team.
North American major league sports
Madison Square Garden (MSG, Financial) and MSG Networks (MSGN, Financial)
Market cap: $4.84 billion and $1.7 billion
NBA and NHL
Liberty Braves Group (BATRA, Financial)(BATRK, Financial)
MLB
The most attractive sports appear to be the four major league North American sports: football (NFL), baseball (MLB), basketball (NBA) and hockey (NHL), although there are no publicly traded NFL teams.
The North American leagues have a lot going for them. All the leagues have a form of a hard salary cap that effectively limits the pool of money paid to players. In addition, all leagues have a government-sanctioned monopoly on their respective sports.
The salary caps have the effect of depressing player salaries. Remember with soccer, the highest-paid player earned $53 million. The NBA’s highest-paid player, LeBron James, earned $30 million and the MLB’s highest-paid player, Clayton Kershaw, earned $33 million. The contrast between the NBA and soccer is true at the team level as well.
Remember, Manchester United spent about 45% of its revenues on player salaries. For its last fiscal year, Madison Square Garden generated $699 million in revenue from its MSG Sports division. Its companion company, MSG Networks (which has the TV rights to the MSG teams), earned $658 million in revenue for a combined total of $1.357 billion. Using data from Spotrac.com shows the Knicks had a salary cap of $103.9 million last season and the NHL New York Rangers had a salary cap of $74 million, for a combined total of $177.9 million. The combined Knicks and Ranger entity spent about 13% of its revenue on player salaries, give or take.
Even if the calculations are off by a bit, the difference between 13% and 45% is vast enough to illustrate the point. In North American major league sports, the salary cap ensures a huge chunk of the team's profits flow to the owners and not the players.
The other major advantage the North American leagues have is the limited number of teams. The North American market has about 365 million people and the leagues ensure the market does not end up saturated with teams. While European soccer markets may have 1 million to 4 million people per team, teams in the U.S. average around 12 million or so people per team. With a potential market that is three to 12 times the size of most soccer markets, it is no wonder the North American sports leagues grow in value faster.
Given a larger potential market and much lower labor costs, it is no surprise we view North American sports teams as the best investments out of the bunch. Indeed, sports teams have historically compounded in value at 12% to 14%, well above the market rate. If you want more information, you can read about Liberty Braves Group or Madison Square Garden Co.
Disclosure: Long MSG, MSGN, BATRA
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