FOOL PLATE SPECIAL
An Investment Opinion
Cleveland Indians Join the Sellout Crowd Brian Graney (TMF Panic)
November 4, 1999
Shareholders of Cleveland Indians Baseball Co. (Nasdaq: CLEV) stood up and cheered this morning as CEO and majority owner Richard Jacobs knocked one out of the park for the benefit of the team. The man who built Jacobs Field (and then, in an expression of modesty typical of American sports, named it after himself) has agreed to sell the Tribe to a group led by Ohio attorney Lawrence Dolan at a price reflecting an enterprise value of $320 million. After all is said and done, the ball club's shareholders will receive between $22.25 and $22.75 per share in cash for their stock stubs. The company's shares moved up this morning, closing some of the gap between the proposed selling price and yesterday's close of $20 5/8 per share.
For the obsessed fans and return-seeking investors alike who jumped at the chance to buy a piece of the Indians at the initial public offering price of $15 per share back in June 1998, today's selling price represents at least a 48% return on investment in just 17 months, or an annualized return of 33%. That's not too shabby, but it pales in comparison to the 210% annualized return that will be realized by investors who bought into the company at its low of $6 1/4 this time last year. Incredibly, lowly Chief Wahoo ended up spanking the annualized return of Internet superstar Yahoo! (Nasdaq: YHOO) by some 75% in the past twelve months.
At its lows last year, the Indians were trading at an enterprise value (market capitalization plus long-term debt minus cash and equivalents) of just over $94 million, causing many self-proclaimed "value" investors to cry foul. Another baseball franchise, the Los Angeles Dodgers, had just been acquired by Rupert Murdoch's media conglomerate News Corp. (NYSE: NWS) for $311 million earlier in the year, even though the boys from Chavez Ravine had not won a pennant in 10 years. The Indians, on the other hand, had advanced to two of the last four Fall Classics and were coming off back-to-back complete home sellout seasons. Surely, the team was worth much more than a measly $94 million.
This may sound like a value investing methodology to some, but such logic would probably cause value investing grandfather Benjamin Graham to groan with the same degree of disgust that major league baseball fans usually reserve for Marge Schott. Relying solely on the valuation afforded to an industry peer and then saying that the enterprise under the microscope is worth a substantially similar amount can hardly be considered high-level security analysis. Even though many sell-side analysts try to pass this kind of exercise off as actual valuation work all the time, it basically amounts to calling every boat on the water a cruise ship, regardless of whether it is powered by oars or engines and is crewed by one or 100.
Then again, a major league baseball team is not your typical economic enterprise. What other publicly traded company that you know of has salaries for personnel as the major operating expense, often equaling 50% of total revenues in any given period? Considering that only a decade ago Hollywood was making feature films based on the Indians' ineptitude on the field, a ball club can hardly be considered a business where future cash flows are predictable and can be discounted back to a present value in a reasonable manner.
Based on these business traits, determining a professional baseball team's intrinsic value requires a heavier-than-usual reliance on subjective market perceptions, much like putting a price tag on a Furby or a Beanie Baby in the secondary market. Such analysis might not fit the traditional idea of value investing as defined by Graham, et al. But many successful value investors have shown that they do not narrow their analytical minds as to focus exclusively on quantitative measures and ignore qualitative measures when valuing businesses.
Need proof? Just ask Warren Buffett, a value investor if there ever was one and the proud owner of a 25% stake in the minor league Omaha Golden Spikes for the past eight seasons.
Daily Double, Cleveland Indians, 06/03/99