April 11, 2010

Squawking Baseball

Forbes' 2010 Team Valuations

by Shawn Hoffman

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Ahh, sports business nerds' annual rite of spring: Forbes comes out with its financial estimates for MLB—including franchise valuations, revenue, income, and the like—and MLB says the magazine is totally wrong. Well, after looking a little deeper at them a couple months ago, MLB is probably right; Forbes' valuation numbers haven't been terribly accurate as compared to actual sale prices, and you'd figure revenue and net income numbers would be even harder to guess.

But with that said, Forbes' annual report is still our best (by default) source for team-by-team financial data. As I said in February, they really shouldn't be used for any kind of rigorous analysis at the team level, but they're still certainly worth looking at—for broader, more generalized trends, if nothing else.

So let's dive in. Here were some interesting things I took away from this year's report:

The team valuations are too low. I guess this partly depends on how you define "value." Maybe the Padres, in a saner world where rich people don't pay huge premiums to own baseball teams, really are only worth $408 million. But in this world, where baseball is awesome, they were sold for $500 million only a year ago. The Rangers, meanwhile, are being sold at a $570-million valuation, which would be sixth on the list; instead, Forbes has them ranked 12^th, at $451 million.

Clearly something's off. Given the sale prices of the Padres and Rangers, the median team value should be much higher than $406.5 million, and there are several teams (the Cardinals, Angels, Phillies, Giants, etc.) that really stick out as being too low. We know from prevous experience that Forbes has historically underestimated sale prices by about 8 percent, on average; but if we're willing to accept the Padres as a league-average team, then the difference is probably closer to 20 percent right now.

The Yankees were profitable for the first time in a long time. First time since 2002, to be exact. Now, we know that's only half the story; the Yankees have essentially been run as a loss leader for the ATM machine that is the YES Network. But Forbes had the team itself turning a $25-million profit last year, thanks to an 18-percent increase in post-sharing revenue. Their cost estimates went up as well, from $379 million to $416 million, despite relatively flat player expenses. But that's nothing, considering their gate receipts alone rose by over $100 million—or more than all but five other teams had total (!).

Total revenues were up, even without the Yankees. Well, sort of. On the one hand, if you simply eliminate the Yankees' $66-million increase, the other 29 teams are still ever-so-slightly up, by $13 million. But that's a really convenient way of looking at things. In reality, the Yankees were responsible for an incredible amount of the sport's business last year; it's impossible to say how much they paid out in revenue sharing, but if their gate receipts went up by $102 million, and total revenue only rose by $66 million, something's clearly got to give. (Or some Steinbrenner, in this case.) And that's not even counting the impact they have on other teams' home attendance numbers.

28 teams were profitable, led by—guess who—the Marlins. And in a shocking turn of events, there was the obligatory outrage. I've said this before: if the Marlins (or any other team for that matter) want to take advantage of the system and just take out as much profit as possible, that's their choice. Their long-term revenue potential—and therefore their franchise value, since potential team buyers almost always base their prices on revenue multiples instead of earnings—will suffer. Like it or not, as long as they follow the rules, that's their prerogative, much like it is on the other end of the spectrum with the Yankees, who people rag on for spending too much.

The bigger story here is that teams were apparently able to manage their costs well, in a year where that was absolutely essential. Forbes had player costs down about $25 million—or essentially flat—which is in line with other estimates. Only the Tigers lost a significant amount of money, although their revenue was actually up $2 million, which, if true, is probably the biggest surprise of any single number in this report. (Last June, a guy I know who works at a ticket re-seller called Detroit "the worst market in the history of the planet.")

The Mets' revenues were flat. That's amazing. So amazing that I'm not really buying it. Technically,Forbes says they were up $7 million, but considering that they opened a new stadium and saw pretty good attendance (relative to capacity), that seems incredibly light. Forbes has their gate receipts up $20 million, and the marginal revenue sharing rate is 31 percent, so something else must have been slightly down. Any guesses? Sponsorships? Local media? Certainly not suites (although that may be counted in gate receipts). None of these are all that likely, so I'm dying to know how they figured this.

The Pirates come in last. Yes, I'm biased, whatever—the Pirates aren't the least valuable team in baseball. Pittsburgh can be an extremely robust sports market when their teams win (even if that team isn't a local religion)—the Penguins have sold out 159 games in a row (the equivalent of about four seasons), and were ranked 11^th in Forbes' hockey report last fall. If the Pirates are ever good, they have a far higher earning potential than the A's, Rays, and Marlins, among others.

 Again, all of these numbers should be taken with a huge chunk of salt. We know they're far from perfect, and the few data points we have bear that out. But I don't think they're totally useless—on a general level, it's a good thing that they think the industry is profitable, and while their valuations are obviously too low, they're still a reasonable starting point.  

Shawn Hoffman is an author of Baseball Prospectus. 
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