What does this mean for professional sports team valuations and their billionaire owners? While it’s hard to gauge the actual short- or long-term impact of “stay at home” orders, phased re-openings and required limited attendance, perhaps Walt Disney, the quintessential entertainment stock, offers some insight.
Disney derives its revenue from four sources: media networks (Disney channel, ABC, ESPN, etc.); theme parks; merchandise; and studio entertainment (movies). COVID-19 forced the shutdown of all amusement parks, which represents almost a third of Disney’s revenue and its highest-margin business. While theme parks are getting ready to open—with limited attendance and social distancing—the impact on the Disney stock price and enterprise value was severe. At the height of the market in January, Disney had a share price of $150 and an enterprise value of $300 billion. With park shutdowns and live sports cancellations hurting the company’s flagship properties of ESPN and ABC, Disney’s stock fell by a third. Disney has recovered as the market anticipates the country reopening for business, but the “Mouse House” remains at a 20% discount to its pre-coronavirus high. Losing $13 billion in revenue from its theme park division (according to analysts’ estimates) impacts the value of the Magic Kingdom for investors.
At Duke, I am often asked by students and faculty what the best investment asset class is. After the usual disclosure of risk/reward, time horizon, liquidity, etc., I note that if you are both fortunate enough and privileged enough to own a professional sports franchise—a non-correlated asset that seemingly never retreats despite any economic or geo-political scenario—it’s hard to beat that asset class. During the financial crisis of 2009-10, every asset class imaginable had sizable losses—money markets went negative—but sports franchises treaded water until they continued their upward trend, buoyed by skyrocketing media contracts, a proliferation of media outlets, and tech and Wall Street billionaires looking for a combination of prestige and diversification.
Since 2000, no asset class has performed better than owning an NFL franchise. The NFL owners have enjoyed a CAGR (Compound Annual Growth Rate) of 10% over the past two decades. Of the four major sports in the U.S., only the NHL has not achieved annualized double-digit growth, but even the “boys on skates” have outperformed the stock market with a still-impressive 7.8% CAGR. While finance has a lot to do with these impregnable returns, economics offers another clue: too much demand, not enough supply.
When calculating franchise values, Forbes is the gold standard. Using enterprise value as a multiple of revenue, Forbes succinctly reflects the worth of teams, without applying “the winner’s curse” or other hyperbole. Like Disney, sports teams derive their revenue from four sources: media rights, merchandise sales, venue related income, and attendance/ticket sales. With no games, no fans and no venue events, two of the four revenue streams have been severely impacted. When Steve Ballmer, owner of the Los Angeles Clippers and the Forum, declares that “I can’t see anybody agreeing to reopen arenas in the foreseeable future” in response to rumors of the leagues resuming play without fans, the eye-popping valuation growth experienced over the last 20 years seems like it could be ready to flatline for a while.
If Disney’s shutting down its theme parks and cruise ships, combined with the loss of attendance-related revenue, has knocked the stock down 20%, what effect will no fans at games have on sports teams and their values?
In 2018, David Tepper, the hedge fund guru, paid $2.275 billion to buy the Carolina Panthers, in line with the Forbes team valuation estimate at the time of $2.3 billion. So how can we value his NFL investment when the NFL returns with no fans or stadium revenue? He paid six times revenue and 30 times profit to join the league as one of the NFL’s richest owners. No fans in Bank of America Stadium in the 2020-21 NFL season means a loss of $75 million in ticket revenue and another $25 million in other venue revenue. We can estimate that this year’s revenue will come in at $100 million less than last year’s $450 million, with a profit of $63 million vs. last year’s $78 million. This would value the Panthers at between $1.9 billion and $2.1 billion using the same ratios, which represents a 10% to 15% loss from his purchase price. For Tepper, a short-term drop in one of your investments when your net worth is $12 billion is not the end of the world (he lost over 50% in PG&E stock in a much shorter time frame while running Appaloosa Management). The average length of ownership for an NFL team is 36 years, so a slight drop in Year 2 won’t be impactful for the Panthers’ owner—or any other NFL owner.
The pandemic has had extreme effects on every aspect of our lives, and while sports has not been immune, what hasn’t changed is the supply/demand aspect of team ownership. As a quant guy, Tepper understands the importance of arithmetic averages and, more importantly, the statistical phenomenon of regression toward the mean. The NFL has achieved an 11% CAGR over a 50-year period, so a slight decline because of an extraordinary event won’t budge the demand curve. With no plans for league expansion and no change in the supply curve, Tepper realizes that membership has its privileges. His reality is likely that it may take him a lot longer to get the Panthers into Super Bowl contention than it will to get his valuation growing again.
This column appeared in Forbes on June 5, 2020.