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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Manchester United

May 2nd 2016

Manchester United
NYSE Symbol: MANU
Industry: Soccer
Price as of 5/2/16: $17.15

 

In like a lion and out like a lamb. The major averages started April on a high note continuing their trend from March and most of February. By mid-month, the averages once again were ready to break out to new highs, but similar to the rally in the fall, came up short once again. The Dow and S&P 500 are the only two US averages clinging to modest gains for the year. The May highs from last year are providing some resistance to this current market. Speaking of May, it's that time again to sell in May and go away.  Following the best six months to invest, November to April, April being the best statistical month of the year, we're entering the worst six months for the major averages when the broader market typically struggles to provide any gains. We'll see how 2016 plays out. In any event, many stocks are holding up well in this environment. Energy stocks come to mind as the fundamentals remain weak, but so far in 2016 investors seem to be looking forward to a better pricing environment come this fall or in 2017. Energy is the second best performing sector this year. Industrials are also making a comeback now the fifth best performing sector. The weaker dollar of late has helped. Caterpillar and United Tech have put in impressive returns while Boeing after a disastrous start to the year is coming back. This week we'll highlight another stock with a disastrous start to 2016 which is making a nice comeback thanks to an article in Barron's from Ron Baron. The stock of the week is Manchester United. Sports teams in general are getting more popular and profitable every year and yet many are not publically traded.  Manchester United provides the unique ability to invest in not only the most popular English premier league team, but also the most profitable soccer club in the world. With a current market cap of $2.8B, or a little more than the LA Dodgers purchase price four years ago, Manchester United provides great risk reward over the coming decade as soccer becomes not only more popular and profitable around the world, but also more profitable and popular in the most lucrative market in the world, the US.
 

Investing and buying sports clubs has become a very profitable business over the last several decades. Just ask Mark Cuban, Jerry Jones and hedge fund managers like David Tepper. More and more sporting teams are selling in the billions which makes it curious why the most popular and most profitable soccer team in the world is worth only $2.8B? Comparing the club to the LA Dodgers again, the LA team has three million Facebook likes. The New York Yankees have 8½ million. Manchester United has 69 million. It has 600 million fans around the world, 300 million in Asia. They get a quarter of their revenue from TV and media, half from licensing, and a quarter from the gate. The company generated $190M in profits last year and that number will only grow. As a father to two kids that love soccer, a sport I never played, I'm watching this next generation in the US shy away from the former All -American sport, baseball and move more toward soccer and lacrosse. The NFL is tops in the US and will be hard to topple, but soccer should surpass most other sports in the US in the coming decade. The US MLS soccer league after floundering for decades seems to be getting their footing and should become a powerhouse league to rival baseball and other sports in the coming decades. With the US fan base getting more involved and interested in soccer, the profits for the US MLS league and European leagues will continue to grow. Instead of watching cartoons on a Saturday morning, my sons watch the British premier league. With higher TV ratings in the US, Manchester United and the other English clubs will only get more profitable thanks to TV contracts and merchandise.  

In the Barron's article, Ron Baron and his fund own 10% of the outstanding shares of Manchester United reducing its already small float even more. Ron Baron called soccer the most popular sport in the world. He said it's like 40 Super Bowls. Ron estimates that as soccer contracts get repriced, soccer clubs and Manchester United will get much higher media rates. The revenue for Manchester United is projected to go from $577.5 million when he bought it in 2013 to $1.2 billion in 2020, and cash flow will go from $171.2 million to $475 million. Ron Baron projects that Manchester United will be worth $6 billion or $7 billion in the coming years verse the current $2.8B. That translated into a stock trading around $40 a share verse a current $17. With more and more sports clubs getting bought for more than a billion or two, the risk reward for Manchester United looks very compelling.