April not only is the dawn of a new baseball season, it is also the time of year when Forbes allows us to swoon over its updated list of franchise valuations.
I’ve written extensively on this subject before. Here are a couple of articles looking at the pitfalls of the Forbes’ data. You can also find a better (but more difficult) method of calculating franchise value here.
Today I want to recap some of the issues I have with the accuracy of the data, and then turn our attention to the 2008 numbers to see what they reveal.
The Forbes problem
The folks who try to work out the worth of each baseball club are fighting an uphill battle. For a start, not much data is released into the public domain: On the revenue side, we have attendance numbers and a smattering of surveys about parking, ticket and sponsorship monies; on the cost side, we have payroll plus a couple of other pieces of ad hoc data with which to piece together a full income statement. The numbers are certainly clearer for revenues than for costs.
If you’ve learned anything from my other writings on this subject, it is that a proper estimate of valuation must be underpinned by an estimate of profits, not revenue. But an estimate of profits requires a deep understanding of costs, and, as we saw above, that’s where the most uncertainty lies. It probably isn’t a surprise, then, to find out that Forbes ignores this advice and uses (mostly) revenue multiples to determine value.
I reckon that the Forbes valuations are accurate within a margin of +/- 30 percent. That band might seem wide (and it is), but the fact remains that, without seeing the books of each and every club, it is nigh on impossible to even begin to work out the proper valuation.
Let’s have a look at the recently published 2008 numbers.
Here is what the wizards from Forbes coughed up this year compared to last year:
2007, $m 2008, $m Team Value Revenue EBIT Value Revenue EBIT New York Yankees 1200 302 -25.2 1,306 327 -47.3 New York Mets 736 217 24.4 824 235 32.9 Boston Red Sox 724 234 19.5 816 263 -19.1 Los Angeles Dodgers 632 211 27.5 694 224 20 Chicago Cubs 592 197 22.2 642 214 21.4 LA Angels 431 187 11.5 500 200 15.2 Atlanta Braves 458 183 14.8 497 199 28.1 San Francisco Giants 459 184 18.5 494 197 19.9 St Louis Cardinals 460 184 14 484 194 21.5 Philadelphia Phillies 457 183 11.3 481 192 14.3 Seattle Mariners 436 182 21.5 466 194 10.1 Houston Astros 442 184 18.4 463 193 20.4 Washington Nationals 447 144 19.5 460 153 43.7 Chicago White Sox 381 173 19.5 443 193 30.6 Cleveland Indians 364 158 24.9 417 181 29.2 Texas Rangers 365 155 11.2 412 172 17.2 Detroit Tigers 357 170 8.7 407 173 4.6 Baltimore Orioles 395 158 17.1 398 166 7.7 San Diego Padres 367 160 5.2 385 167 23.6 Arizona Diamondbacks 339 154 6.4 379 165 5.9 Colorado Rockies 317 151 23.9 371 169 26.2 Toronto Blue Jays 344 157 11 352 160 -1.8 Cincinnati Reds 307 146 22.4 337 161 19.3 Milwaukee Brewers 287 144 20.8 331 158 19.2 Minnesota Twins 288 131 14.8 328 149 23.8 Oakland Athletics 292 146 14.5 323 154 15.4 Kansas City Royals 282 123 8.4 301 131 7.4 Pittsburgh Pirates 274 137 25.3 292 139 17.6 Tampa Bay Devil Rays 267 134 20.2 290 138 29.7 Florida Marlins 244 122 43.3 256 128 35.6
According to Forbes, year-on-year revenues are up 7.7 percent, whereas the worth of the average team is up 9 percent. You’d have thought that this discrepancy is explained by increased profitability; you’d have thought wrong: Total operating income actually fell by a shade less than 1 percent. How value increases under this scenario is anyone’s guess (Forbes must believe that future profitability will be higher now than under previous assumptions).
The movers and shakers
The franchise that enjoyed the biggest increase in value was the Colorado Rockies, at a 17 percent clip. Presumably they coined that value by reaching the World Series. Revenue last season jumped 11 percent, just slightly ahead of average, but the theory is that that the Rox will reap the rewards of increased attendance this season (and for several seasons to come).
The other teams that fared well were the White Sox and the Angels. The White Sox saw their profits grow by over 50 percent as they continued to benefit from their World Series win in 2005. The Angels, on the other hand, epitomised a trend that better play on the field translates to more lucre off the field.
Collectively, the eight teams that played October ball in 2007 saw their value rise by 12 percent. The Angels’ decision to add the “Los Angeles” tag likely had little to do with their gain.
What about the worst-performing teams? The value of the Washington Nationals rose less than 3 percent, but this followed an enormous increase a couple of years ago after the team relocated from Montreal. Expect the Nationals’ worth to accelerate now that the new ballpark is open (though you’d hope that the value of that asset, which is now complete, would be reflected in the data).
The team with the least revenue increase was the Tigers: Despite their reaching the World Series in 2006, revenue in 2007 grew only a couple of percentage points as the team failed to qualify for post-season play. Still, Detroit’s value rose 14 percent, presumably a lingering effect from the postseason halo.
Looking at profits, last year only the Yankees made a loss. This year, New York doubled that loss, and they were joined in the red by Boston, who went from $20m up to $20m down. Expect the Red Sox’s position to improve next year, since the 2007 accounts were blighted by the one-off payment of $50m for Daisuke Matsuzaka. Omit this and income looks healthy. How the Yankees continue to lose money yet still top the table in value is a mystery (hint: The answer is spelled “Y-E-S”).
Interestingly, the two teams that pocketed the most loot in 2007 were the Nationals and the Marlins. The Nationals’ income doubled from $20m to $40m (so how does value not grow????). Meanwhile, the Marlins trousered $36m, down slightly from last year but still good for the No. 2 spot. Apparently, the Marlins remain the least valuable franchise in MLB despite having a five-year payback on net worth!
Here are the revenue and profit multiples, from highest to lowest valuations:
2008 Multiples Team Revenue Profit New York Yankees 4.0 -47.6 New York Mets 3.4 30.2 Boston Red Sox 3.1 37.1 Los Angeles Dodgers 3.0 23.0 Chicago Cubs 3.0 26.7 LA Angels 2.3 37.5 Atlanta Braves 2.5 30.9 San Francisco Giants 2.5 24.8 St Louis Cardinals 2.5 32.9 Philadelphia Phillies 2.5 40.4 Seattle Mariners 2.4 20.3 Houston Astros 2.4 24.0 Washington Nationals 3.1 22.9 Chicago White Sox 2.2 19.5 Cleveland Indians 2.3 14.6 Texas Rangers 2.4 32.6 Detroit Tigers 2.1 41.0 Baltimore Orioles 2.5 23.1 San Diego Padres 2.3 70.6 Arizona Diamondbacks 2.2 53.0 Colorado Rockies 2.1 13.3 Toronto Blue Jays 2.2 31.3 Cincinnati Reds 2.1 13.7 Milwaukee Brewers 2.0 13.8 Minnesota Twins 2.2 19.5 Oakland Athletics 2.0 20.1 Kansas City Royals 2.3 33.6 Pittsburgh Pirates 2.0 10.8 Tampa Bay Devil Rays 2.0 13.2 Florida Marlins 2.0 5.6
From this chart, we can see that Forbes’ principle tool in rating teams is the revenue multiple, not the EBIT multiple. This approach is wrong on so many levels, but the decision to go this route is understandable: It is simpler and the data is more robust. Still, a full exercise would give us a lot more confidence.
There is a clear correlation between revenue multiple, success and value. Intuitively you might think this is right, but it isn’t. Surely successful clubs are worth more because they make more money? Yes, but why is a dollar collected by the Yankees worth more than a dollar collected by the Rays? One possible answer is brand value, but again we’d expect to find this value in either the top or bottom line. Suggestions in the comments section, please.
This correlation presupposes that investors in the open market are willing to pony up relatively more cash for big-market teams. Is there evidence for this? Unfortunately there are too few transactions to say. Undoubtedly, there is a premium for investors buying sporting assets, but why would this premium rise substantially for, say, the Red Sox over the Athletics?
The EBIT multiples look even more ridiculous. The average is 25x earnings, which is dot-com-esque. I won’t rehash the arguments except to say that EBIT is very hard to calculate precisely, especially in an industry with all sorts of off-balance-sheet arrangements. Suffice to say that if I could get the Marlins at 5.6x EBIT, I’d bite their hand off.
We have to work with what we have, and unfortunately for students of the business of baseball, this is what we have. It’s better than nothing, and the revenue data is probably a fair yardstick. But putting faith in the EBIT numbers is dangerous, and as a result the final valuations are not much better than educated guesses.
As I said at the top of the article, the margin of error on these valuations is around 30 percent. Can we really accept that?
References & Resources
Thanks to Forbes for providing content for this column every year.