April 24, 2009

The Biz Beat

Forbes on Baseball

by Shawn Hoffman

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Forbes came out with its annual Business of Baseball report this week, including the magazine's estimates of each team's financial performance and current value. By the time you read this, Bud Selig and a few team execs will have probably called the numbers ludicrous, or worse. Regardless, they're still our best source for MLB financial data, and at the very least, they make for some interesting conversation.

With that in mind, here are some thoughts:

• Let's get the biggest numbers out of the way first. Despite the awful economy, franchise values are up about 2.1 percent, to an average of $481.9 million. The Yankees are up fifteen percent to a major league-best $1.5 billion. The Mets follow at $912 million, while the Red Sox ($833 million), Dodgers ($722 million), and Cubs ($700 million) round out the top five. (Note that the Cubs were sold for $900 million, but that included the purchase of Wrigley Field and a 25 percent stake in CSN Chicago.)

  As Maury Brown noted yesterday, ten teams saw their franchise values go down, marking the first declines since 2005. The teams that were hit the hardest-Washington, Atlanta, Seattle, and Detroit-all had disappointing years on the field. Aside from the Yankees and Mets, the teams with the biggest gains were the Rays (for obvious reasons), and the Twins, who will be moving into their new ballpark next season. The world champion Phillies only moved up three percent, which is rather slight compared to previous World Series winners.

• If there's an obvious problem here, it's that this year's cumulative Price/Earnings ratio is 28.9, which is actually up from last year's 28.7. For comparison's sake, stocks in the S&P 500 were trading at 22 times that of earnings at this time last year, and are now at about 14 times the projected earnings. If we take out the Yankees-they generally tend to skew these types of numbers, especially this year-P/E actually rises even more, from 23.8 to 25.7. Meanwhile, MLB's Price/Revenue ratio-which is supposedly what Forbes leans on the most for its valuations-is down just barely, from 2.58 to 2.48, or from 2.49 to 2.38 if we exclude the Yankees.

  There is another side to this argument: look at the teams that were actually sold this year. Excluding other items, the Cubs were sold for $700 million (2.93 times revenue), and the Padres went for $500 million (2.87 times Forbes' revenue estimate). If anything, it appears that the magazine may actually have the teams undervalued. What's going on here?

  The reality is that MLB teams are very scarce properties, and the market is incredibly illiquid thanks to all the regulations that MLB puts on team sales-just ask the Tribune Company. As such, it won't always move like a normal market. With that said, MLB's future earning potential is lower now than it was a year ago, before our financial system imploded, so whether this year's numbers are off, or last year's numbers were way off, there's certainly an inconsistency here.

• Now on to the team-by-team net income estimate. If there are any numbers in this report that can usually be dismissed, it's these, so take this with an enormous block of salt. The teams with the biggest profits were the Marlins ($43.7 million), Nationals ($42.6 million), Cubs ($29.7 million), Rays ($29.4 million), and Orioles ($27.2 million). Forbes has only two teams in the red: the Yankees (-$3.7 million) and the Tigers (-$26.3 million).

  Even if we assume that these numbers are somewhat accurate, they don't necessarily represent the financial conditions of those teams. Operating income (or EBITDA) doesn't take into account capital expenditures, debt repayments, or certain fixed expenses, so while certain teams might be extremely profitable in terms of continuing operations, they could also be cash-flow negative. Teams that open up new ballparks, or renovate their existing ones, can often find themselves on the top of Forbes' income list, even as they burn more cash than they take in. That's not to say most teams aren't running healthy businesses-they almost certainly are. But the perception that small-market teams are sitting on tens of millions in revenue sharing income is usually incorrect (the key word being usually).

• Overall revenue: $5.8 billion. That's significantly less than the $6.5 billion MLB itself reported, but it actually makes sense. Forbes only estimates what the thirty teams bring in; that doesn't factor in revenue from subsidiaries like MLB Advanced Media, nor does it include the cut that the commissioner's office takes from the shared pool (i.e. national media, and the like). With those sources included, the magazine's estimate is very close to MLB's number. (It wouldn't shock me if Forbes actually cherry-picks the real data, and works backwards from there.)

• The debt numbers usually aren't very interesting, but in this credit market they could take on a greater significance. Most of the teams at the top of the Debt/Value chart have recently opened new ballparks, the Yankees, Mets, and Nationals among them. Sitting there behind the two New York teams is the Texas Rangers, who opened their ballpark in 1994. This isn't related to Tom Hicks' holding company defaulting on a payment last week, but it probably does add to what we already know about his general attitude toward debt. Regardless, it's still very unlikely that the Rangers, or any other team, will run into any serious trouble, since most teams borrow from MLB's collective fund, which still holds an 'A' credit rating. In this economic environment, however, never say never.

Overall, Forbes paints a rather healthy financial picture for MLB, though most of the money was already in the bank when the financial crisis hit in September. As for the numbers themselves, I do think they're useful from a macro viewpoint, especially since they really are the best we have. The valuations aren't perfect, and the team-by-team income numbers are still falling way short-the idea that the Yankees are losing money every year fails the laugh test-but until all thirty teams go public, we'll just have to work with what we have.

Shawn Hoffman is an author of Baseball Prospectus. 
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