Saw an interesting thread on wso about valuing a sports team.
THought Id ask here what the CFA community’s thoughts were on how to go about this.
I saw the forbes valuations, and from the little info they give on their methodology they seems pretty crappy.
Would valuation using a regular type DCF method work. Just getting the financial statements and projecting forward form there?
Any thoughts??
No because there are a fixed amount of pro teams. Anyone can start a corporation for a few hundred bucks. Completely different methodology.
No because there are a fixed amount of pro teams. Anyone can start a corporation for a few hundred bucks. Completely different methodology.
[/quote]
Good point, but then what do you suggest? why pay more for it when really it should be worth what it can earn? I guess this is the “ego premium”
^Once again, Blake is wrong. The value of anything is its future earnings or CF’s discounted by a required return. If you think that a fixed amount of sports teams increases the future earnings, that’s fine, increase the groth rate or lower the required return. That doesnt mean regular asset pricing models dont apply.
I don’t agree. If you have to use growth rates or required returns that do not apply than obviously the model is not correct and there is an asset premium that should be included.
Lots of intangibles with a sports team such as brand, merchandising, stadium, etc. I’m not saying DCF methods are useless, they can be used to value revenue streams, but you cannot rely on them 100%.
I’d love to see a pure DCF model to value the Dallas Cowboys with all of the intangbles and that new stadium. Not possible.
Blake, DCF doesnt meant that you have to use constant required returns or growth rates, you can use multistage models, different imputs for every year into t+ infinity. And stochastic models to get more of a range, or probablistic estimates. The value of anything is the PV of future cash flows, even if you use price multiples its just an adjustment to comperable transaction’s DCF. Unless you’re an accountant and you prefer book value.
Systematic, I’m guessing if you created a multi factor regression model for every sports team with many inputs you will see an enormous value for the intercept which would be the premium paid for a professional sports team. I’m not saying looking at cash flows are useless, it certainly would be a component of a valuation model. If the intercept was zero you would be able to say the value of a sports team is 100% discounted cash values.
But getting back to your first post:
“The value of anything is its future earnings or CF’s discounted by a required return”
This is not true. Tech companies do not value acquisitions in this manner necessarily. There are other methods. Not getting into details on this.
I think there’s a lot of truth to this. The brand name is worth a big premium. The Cowboys/Yankees/Lakers are perfect examples.
Also, winning also causes a team to be worth more, because of increased ticket prices, jersey sales, and primetime TV slots. But it’s impossible to know who will win the SB in five months, let alone five years.
And if a team stays on top for a long time (New England Patriots), then their intangibles will change as well.
If those intangibles don’t translate to cash flow at some point, they have no real value. That being said, there is an ego factor for owning a sports team that can’t really be quantified.
^This, those intangibles are supposed to translate into a lower discount rate or higher growth rates. I wouldnt be supprised if there’s a large y-int on sports teams because but I’m sure if you add a variable like TV concratcts, number of superbowl championships, the cost of the stadium I’m guessing it would absorb much of the intercept
Also I would consider liquidity to be a factor. How often does a sports team turn over? When these ownership groups bid on a team that becomes available they make offers that are way over the top, they don’t come in at “fair value.”
Consider that vs MSFT stock where yes you can look at their cashflows and come up with a “fair value.” If you value MSFT at $32 and it is trading at $32 why would you buy it?
“way over the top”
The best definition of fair value is what a willing buyer and willing seller are able to agree upon. That’s how a market works- but whatevs, we dont need to talk about this anymore. Yes, the transaction is much more opaque and there’s not much in the way of comperable recent transactions that help guide investors, but the best estimate of what something is worth is the price that 2 willing parties both motivated by profit agree upon.
Jay Z was a boss with his sports team investment?
Blake when you talk about software companies do you mean they buy companies for non-financial (development, competitive) reasons? I know DCF isn’t necessarily the mechanical side of it, but aren’t the motivations/drivers towards that goal and part of the underlying objective (to improve firm financial performance through better long-term cash flows than without the acquisition)?
I couldn’t agree with you more but earlier you were saying the value of an asset is the sum of its discounted cash flows. You do understand these are completely different methodologies my friend? A football team is not worth the sum of it’s discounted cash flows because of intangibles. It’s worth what two parties agree to pay. I am willing to bet Jerry Jones would not sell the Cowboys for 500 mm more than whatever that Forbes value is. On the other hand I am willing to bet the owner of Jacksonville would.
Are basically saying that sports teams should be priced like art or commodities? I’m not challenging you here, because I can see an argument for that; it just seems to be the implication of what you are saying. DCF is useless because people just pay what they feel they can bargain for. So much ego involved that prices are already so far above their DCF values that DCF is useless?
But presumably someone is doing an analysis and at least telling them what a DCF like value is, which is then ignored by the person who just wants to be an owner.
In tech, lots of acquisitions are overpaid in hindsight. But there, the justifiable value of assets are at some level the result of DCFs of some sort. Even comp multiples are a kind of shorthand for DCF analysis with a set of assumptions about relative risk and growth trajectories. Buying a technology may be strategic in terms of keeping a technology out of a competitor’s hands or retaining or growing market share, but at some level it still has to be justified by expected effects on future cash flows or the acquisition is value destroying.
Blake, all you have to do is decrease the required return and increase the growth rate to get to these “unjustifiable” values. Maybe the Required return is zero and the growth rate is half a percent, you’ll get values even higher than what you feel is just a BS number that some billionaire paid. These people always think that with them at the helm the growth rate will be 5x what the current owner’s growth rate is too… trust me, you can justify the prices these teams sell for with asset pricing models… that doesnt make it a good investment, just sayin its the basis for valuation.
Read your sig, I’m not saying the prices are right ot the imputs are, but the same models we apply to equity in corporations applies to equity in these LP’s/sports teams
Makes no sense dude. What you are doing now is pulling a value out of thin air and then making your inputs be whatever is necessary to come up with this fictional value. Don’t you see the nonsense in this? So just to summarize your position in order: 1) First you said the value of any asset is the sum of its discounted cash flows 2) Then you said the value of any asset is what two parties agree to pay 3) Now you are once again going back to the cash flow argument but saying you come up with a value first (out of thin air) and then adjust your inputs using plug values to come up with this fictional value Did you learn this in the CFA program or is this how your firm does business?
Lol, you actually got that right. All 3 are the same thing… No, either I or my firm do business like this, but I believe you’ve worked with the entrepreneur types in Palo alto that think they can turn waste into wine, so what’s your point?
No dude, all three are not the same. Stop making a fool out of yourself.