Friday, September 14, 2007

Forbes NFL team values and the Picasso theory

Forbes has just released its annual listing of NFL team values, revenues, and earnings. The Dallas Cowboys “are now the single most valuable sports franchise on the planet,” at $1.5 billion. The average NFL team is worth over $950 million.

Just as for the NHL, the value of football teams is highly inflated given the amount of earnings. The mean team operating income in the NFL is $17.8 million, which is only a 1.85% return on the $950 million average market value. Put another way, the “enterprise value ratio” of the average team is over 50 (950 divided by 17.8). Typically, publicly traded businesses are around 10.

I argue that teams are inflated because they are toys for the rich. If that’s the case, we can figure out how much those toys are worth. If the team owner invested his $950 million in an investment earning, say, 8%, he would have made about $76 million. Instead, he made only $17.8 million. So rich old football fans are willing to spend $56 million a year to own a team.

In hockey and baseball, though, the figures are much lower. NHL teams earn 2.3%, and so the cost of ownership is 5.7% of their $180MM value. That’s only $10 million.
In baseball, the average team (I eyeballed the chart) seems like it’s worth about $400 million, and earns $16.5 million. That means the cost of ownership is $15.5 million a year.

My theory, that sports teams are like Picassos – owned for the pleasure of ownership – suggests that the cost of NFL and MLB teams should be closer than they are. You can own an MLB or NHL team for less than a third the annual cost of owning an NFL team. Why should that be so? Are NFL teams so much more fun to own? Is there really so much more demand that prices should be three times as high?

Another theory, from David Gassko (
see comments), is that owners know they will eventually be able to sell teams at a hefty profit, and so don’t care so much about operating earnings. But that still doesn’t explain why NFL teams should be worth so much more, does it?

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At Friday, September 14, 2007 3:56:00 PM, Blogger Unknown said...


You probably know my position on this but I'll give it again. I think the Picasso theory does have legs but by no means explains all of the gap, in fact I suspect it doesn't even explain the majority of the gap.

In sports, and in American Sports in particular, teams are penalized for earning higher revenues and profits through various revenue sharing and capping schemes. This means that there are strong incentives for teams to hide money off the income statement.

This certainly happens a lot in baseball and I suspect the same is true for football. The amount of money flooding into the game is phenomenal. You just have to chart the growth of tv money and the rising ticket prices. New stadia also attract money. Yes, salary is increasing but the old adage that 10% revenue increase and a 10% cost increase = a 10% profit increase holds. That is what is driving a large portion of the capital appreciation. Baseball is a monopoly and that in itself will drive superior returns.

If you look at soccer where the accounts are more transparent the off-balance sheet stuff doesn't happen as much. Also clubs prefer to paint a picture of being impoverished to assuage fans who pay sky-high ticket prices. Finally the Forbes method for baseball is deeply flawed -- I suspect the same is true for football.

And the Cowboys the most valuable sports franchise? Gimme a break Forbes. Try Manchester United, Real Madrid or Barcelona. All worth $2bn +.

There is a world beyond the east and west coast believe it or not.

At Friday, September 14, 2007 7:27:00 PM, Blogger Brian Burke said...

There is very little risk owning a major league sports team. Although the sports compete with other options for entertainment, recent history demonstrates there are insurmountable barriers to competition. NFL football is probably the most secure of all professional leagues. Wouldn't that account for some of the excess valuation?

At Friday, September 14, 2007 10:45:00 PM, Blogger Phil Birnbaum said...

John: I agree that the Forbes NFL numbers do cast some doubt on the Picasso theory.

But NFL teams would have to make three times as much profit as Forbes says they make in order to put them reasonably close to other businesses. Do you think that the hidden earnings can be that high?

What else do you think is causing the gap betewen sports teams and IBM, besides hidden earnings, future increases, and Picasso effects?

Yeah, it occurred to me that I'd read about European teams being very valuable. Wasn't sure if Forbes had considered them, but I guess not. A strange omission ...

At Friday, September 14, 2007 10:49:00 PM, Blogger Phil Birnbaum said...

Brian: good point ... if NFL earnings are safer than NHL/MLB earnings, that would explain part of the difference.

It's a big difference, though, and risk isn't normally rewarded THAT highly that the Bills should cost so much more to own than the Sabres. Or is it? The NHL now has a salary cap that's based on revenue, so that makes it less risky than before.

Also, labor contracts can change when they come up for renewal ... NFL earnings might not be as safe in 20 years as they look now.

Still, I think you're right that that probably accounts for some of the difference. My guess, though, is that it's a small part of the difference.

But I could be convinced otherwise.

At Saturday, September 15, 2007 12:01:00 AM, Blogger Brian Burke said...

I think you touched on something when you mentioned labor contracts. The NFL Players Association has a reputation for being weak relative to other sports unions. The NFL has established a salary cap system which is the envy of the other leagues. That must count for something.

In contrast, the labor cost uncertainty in MLB must hurt the value of most of the baseball franchises.

One final point--The parity/salary cap/revenue sharing of the NFL might raise the value of the smaller market teams. Since there are more smaller market teams than big ones, the NFL values would be higher than otherwise. Following the Picasso theory, your chance of winning a championship by buying the Baltimore Ravens is significantly higher than if buying the Baltimore Orioles. (There are no Yankees or Red Sox in the NFL.)

At Saturday, September 15, 2007 12:31:00 PM, Anonymous Anonymous said...

There is yet another factor here. The NFL forbids corporate ownership of teams. That makes it more likely that an NFL team will be a rich man's toy. The case is not the same in baseball. Why does a corporation like the Tribune Company own the Cubs? I'm sure it's because it's a profitable enterprise, whether in itself or through synergy with other Tribune properties.

And look at Liberty Media's acquisition of the Braves. The consensus among financial analysts is that the primary reason for the acquisition was because of the tax breaks that would accrue to them.

At Monday, September 17, 2007 10:33:00 AM, Anonymous Anonymous said...

I like the way to analyze this in terms of opportunity cost.

For me, this question is the same as one you could pose between 2 companies: Google currently trades at a price to earnings ratio of 42. The S&P 500 averages a ratio of about 16. Typically, investors respond that the gap is explained by expectations of earnings growth at Google above and beyond the typical range. The gap is not due to the fun of owning Google.

That being said, maybe the explanation of NFL vs. typical business is a combination of earnings growth expectations and fun. I would imagine that the growth over the past 10 years of the NFL relative to MLB and NHL would justify a substantial difference in their market value/earnings #s - if one was to assume that growth in popularity will continue.

There are only 32 of these items in the whole world, so pricing gets a little nuts when one is up for sale I guess. Whether or not there is a profit to be made in the future depends on whether: a. the league continues to grow exponentially to justify the earnings ratio, b. a "greater fool" will come along a pay an even greater multiple on earnings than you did, or c. neither and you've just paid $50 mil/year in opportunity cost to have great season tickets.

At Monday, September 17, 2007 10:55:00 AM, Blogger Phil Birnbaum said...

I think that's right ... it's a combination of intrinsic value and Picasso value, and also perhaps a bit of a bubble effect too.

My problem is that I can't see how the NFL could grow earnings enough to be worth three times as much as a similar business. The league is so popular now, could it really grow enough to be THREE times as popular? And, remember, too, that normal investments will double in, say, nine years. So even if the NFL does triple in nine years, it will still be overvalued by a factor of 2.

My gut says the 200% apparent overvaluation looks something like this:

10% growth potential
40% hidden earnings (as John suggests)
50% bubble
110% Picasso

But I'm just making this up. It will probably change as I think about this more. Before I saw that NFL teams had a higher opportunity (Picasso) cost than other sports, I would have put the Picasso factor higher.

As I said, this is just my gut.

Anybody have suggestions on what kind of data would help narrow this projection down?

At Monday, September 17, 2007 10:55:00 AM, Blogger Phil Birnbaum said...

Oops, I guess it's a 300% overvaluation, not 200%. But you get my point. :)

At Monday, September 17, 2007 11:47:00 AM, Blogger Tangotiger said...

"Enterprise value" is the value of the asset (analogous to market value). What you quoted was the PE, or price to earnings ratio, or value of asset divided by the earnings of that asset.

At Monday, September 17, 2007 11:50:00 AM, Blogger Phil Birnbaum said...

Right. My argument was that if similar businesses have an enterprise ratio of 12, but NFL teams are at 48, they are overvalued by 300%.

Am I misunderstanding your comment?

At Monday, September 17, 2007 12:00:00 PM, Blogger Phil Birnbaum said...

Oh, I see, I used "enterprise value" when I meant "enterprise ratio". Thanks, will fix.

At Monday, September 17, 2007 12:08:00 PM, Anonymous Anonymous said...

"The league is so popular now, could it really grow enough to be THREE times as popular?"

I'm not sure, but we may know more one way or the other after the Giants-Dolphins game at Wembley Stadium...

It will be hard to grow much more within the U.S. - need to export.

At Tuesday, September 18, 2007 7:31:00 PM, Blogger Unknown said...

People were saying the same a decade ago and look where we are.

If you look at nfl I think you can paint a strong growth story if you wanted to. Can't you always?

Internet properties remain underexploited -- look at what baseball is doing with mlbam and think about what football can do. As the internet continues to grow and mobile devices connect to the web the potential for services will explode and people will be prepared to pay for that. I don't think we should underestimate the effect that could have on market value.

Also TV rights have continued to grow and, I suspect, will continue to do so. I guess if the economy takes a slide then at the next round these could grow at a slower pace -- who knows.

I agree with Nate on the export point but US sports typically export badly. NFL in London will be popular but more for scarcity value than anything else. I have spent a lot of time in the city (and have a house there) and very few English people every worry about the NFL -- although there is certainly a core of support at superbowl time.

The other factor is the monopolistic nature of the leagues. This *must* inflate the p/e ratio as it represents a safer investment.

For me the best way to investigate the issue is to look at English/ European soccer teams a few years back. There were a lot of teams listed on the market and UK law requires detailed P&L's to be registered with Companies House. We could use these and some other assumptions to develop suggested values. This will give the intrinsic value and any exta is Picasso, as you call it.

Also in soccer there is less hidden earnings (hypothesis) because salary caps etc don't force teams to hide money.

Finally I think you (Phil) underestimate the growth potential of the sport. If you believe that from media and Internet revenues/ profit can grow at 10% then that does imply a reasonably healthy p/e ratio. My guess, and it is just a guess, is that the Picasso value account for an addition 10-20% of the total EV max.

At Thursday, November 29, 2007 2:20:00 PM, Anonymous Anonymous said...

umm yea i was just looking at this cuz i want to buy the packs


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