Plenty of fans might dream of owning a piece of their favorite sports teams -- and in a few cases, you can. But unlike most other business spaces, the opportunities for retain investors to get involved in this one are very limited.
On this episode of Industry Focus: Consumer Goods host Vincent Shen and guest Fool Daniel Kline open up the mailbag and answer a listener's question on sports team stocks. The two talk about all the opportunities investors (and fans) have in the sports world. They also explain how tracking stocks work and why there are limited opportunities in the sports world to directly buy an interest in a franchise.
A full transcript follows the video.
This video was recorded on Aug. 3, 2017.
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen, and it's Thursday, Aug. 3. Joining me in studio at Fool headquarters is fool.com contributor Dan Kline. We're pre-recording this show for next week, and we have lined up for our Foolish listeners a mini mailbag with an interesting question on tracking stocks and investments in professional sports teams. We'll follow up, if we have time, on some earnings for McDonald's and the pizza company it's emulating. Dan, it's great to see you. Every time you come to Fool HQ, your tan is a little bit darker.
Dan Kline: Thank you for sending the Fool jet to get me.
Shen: So, Florida, I'm guessing, is treating you quite well.
Kline: It's delightful, living someplace where it's never cold. You really do not get tired of that.
Shen: Sure. I'm going to lead us off with our listener question. This comes in from Frank ColeMan It's a two-parter. His first question was, "What do you think of sports teams' stocks such as Manchester United (NYSE:MANU), ticker MANU, and [Liberty's] (NASDAQ:BATRA) Atlanta Braves tracking stock, ticker BATRA, at least for the A-class? Do you know of any other publicly traded sports?" Unfortunately, Frank, there's not much out there for investors who are interested in buying into professional sports teams or leagues, unless, of course, you have a couple billion dollars.
Kline: There's a big exception. There's one that we've talked about.
Shen: Yeah. So, unless you have the money to buy and franchise outright, the two you mentioned, which are Manchester United and the Atlanta Braves, or Liberty Braves, as the stock is called, are about as good as it gets in terms of the pure-play investments.
Kline: And they're both very dreary stocks. They don't do a lot. The reality is, it's because they're mostly income capped. In terms of the Braves, they have a fixed television deal. Attendance goes up and down a little bit, but it's not huge variances, so you can see where their revenues are. There's not as much volatility as a more diverse business.
Shen: Yeah. Beyond those two, there are also some what I would describe as roundabout ways of getting some exposure to a professional sports team in your portfolio, though we don't necessarily recommend that you do that or buy into these companies purely for that purpose. For example, there's Madison Square Garden (NYSE:MSGN), ticker MSG. It's a $5 billion market-cap company, and they offer a wide variety of live entertainment, including concerts, performing arts and sports. The company operates the very famous Madison Square Garden in New York, as well as Radio City Music Hall and some other venues in that city and in other regions as well. The relevant part of this business is the MSG sports segment. That represents about two-thirds of the company's top line. This business generates revenue from what you would imagine. Ticket sales, licensing --
Kline: The important thing is they own the Knicks and the Rangers. They own some other things -- the New York Liberty in the WNBA. But the lowly Knicks and the almost high-flying Rangers -- I'm a Rangers fan.
Shen: Exactly. They also produce some events like boxing, college basketball. But those two that you mentioned, Knicks and Rangers, are the big franchises. The ticket sales are a big revenue driver for them. What is your experience with them?
Kline: Again, if you're buying MSG stock, it's not quite a novelty like buying Packers stock -- which isn't a real stock, it's more like a symbol of owning a piece of the team. But, again, MSG is not likely to diversify. They're not likely to buy a completely new business, or buy a baseball team. There's just none for sale in New York. So, if the Knicks make the playoffs and start to get better, [or] the Rangers win the Stanley Cup, there's some upside. But it's pretty much, this is the business, this is how it performs. Rights deals are locked in for long periods, there are some negative headwinds on the cable side of their business, the MSG network, because less people are going to have cable in their homes, so the carriage fees for those are going to start to go down over time. But in general, these are very stable, boring, they're not going to do much for you. If, as a fan, you want to own a couple of shares of Man U or Braves stock just to say that you have it, or MSG, great. But they're not investments, I would say, that are really going to do anything for you.
Shen: The big thing I would keep in mind, too, to really go into this, if you decide that you want exposure to some of these companies, is to keep a very long-term perspective. Because you are going to see a lot of volatility in the year to year results based on how some of these teams perform. So, even with Madison Square Garden, where it's not solely based on the franchises --
Kline: I'd be very concerned with Madison Square Garden, because there's going to be some upcoming sports that do not get more money when their national rights deals go out. And hockey doesn't do that well anyway. But hockey could see a smaller package. And basketball, absolutely, which does not draw well in the ratings. It's like baseball. They have a lot of inventory, so it's good for their partners, ESPN and TBS, it fills up a lot of time. But they could see ESPN or somebody drop out. In the case of the NHL, there's not a lot of companies that were interested in that last time. So if NBC isn't interested, or wants to cut that back, and that's a significant piece of revenue for those leagues, and conversely for the teams. So, live attendance is probably not going to suffer. The Knicks and the Rangers sell out every game, even if it's not full. If they're better, they'll make a little more in concessions and other things like that. But in general, there's not a lot of upside to any of these stocks.
Shen: And if you listen to the company's earnings calls, you hear them talk about the season. They'll talk about playoffs, whether or not they make it, of course, their all-stars player compensation. And if you look at Madison Square Garden stock, the company is up 20% in the past year. Meanwhile, as you mentioned, Dan, the Knicks have been playing very well for the last three or four seasons. The Rangers, at least, are doing much better than that. But you can't always assume the performance of these teams will correlate with the financial performance of the franchise or the price of the shares. If you want to stretch the connection, at least, between financials and franchises even further, there's actually a few other companies I want to bring up. Really quickly, they're Canadian companies, and that includes Rogers Communications and Bell Canada. They own major stakes in the Toronto Maple Leafs, the Raptors and the Blue Jays. But these are $30 billion and $50 billion companies. So, the sports teams make up such a small part of their business that I would never even consider them to be major drivers of that investment story at all.
Kline: The real value in owning a sports team is the appreciation of the franchise. If you look at baseball teams and basketball and hockey teams -- not so much NFL teams -- they may lose money on an operating basis from year to year. Not a lot of money, because of the TV deals, but lose money. But some of these teams that were purchased, the Clippers, recently, for $2 billion by Steve Ballmer, which was something like 20 times more than they sold for last time. Usually, when you see the Forbes valuations for these franchises, when they sell, they sell for much more than that, because they're novelty purchases for billionaires. If, right now, the Knicks were put up for sale, and some of that value [were] returned to shareholders, they would probably be worth well more than what their actual paper value is, because who wouldn't want to own the basketball team playing in Madison Square Garden in New York?
Shen: Yeah. So, Frank, I'm going to turn back now to some of the companies that you specifically mentioned. For Manchester United, let's take a look there. This is a company that generates its revenue from similar sources as we talked about for Madison Square Garden. You're talking about partnerships, merchandising, ticket sales, broadcasting rights. Obviously, this is a team that has an absolutely legendary brand and reputation, what you alluded to, Dan. 140 years in the making. They have hundreds of millions of fans around the world. The company has a valuation of about $3 billion.
Even then, I'm still hesitant to stake your investment on the performance of a single team. It might not necessarily be as bad as placing a bet in Vegas, for example. But how often do the experts and the biggest fans of any franchise really accurately predict the results of that team's performance, year in and year out? The thing is, you look at, for example, 2015 for Man U, when the team did not play that well, they failed to qualify for Champions League, they lost out on Match Day revenue, they lost out on broadcasting revenue, sponsorships, and that showed in the financial results.
So going back to that point, a lot of investors need to be willing to stomach some more year-to-year volatility with something that tracks a single team like this. You might see part of the commercial business, which is more stable, which might include things like the sponsorships, merchandising, the broadcasting, that might eventually help stabilize things to an extent. But you're better off taking a step back and a more high-level view.
And I think there are some tailwinds for the company. Specifically for Man U, at least, you have soccer, worldwide, the popularity is really growing. UEFA, which is the administrative organization that oversees the sport in Europe, they're commanding higher and higher price tags for the broadcasting rights to games. I think the last deal was $3.4 billion, up from $2.5 billion. And Chinese companies are actually starting to shell out hundreds of millions of dollars, if not billions of dollars, to establish the fan base and viewership market there, as they're trying to grow up the sports base.
Kline: And there's always the possibility that it finally catches on here. Premiership games -- the rights have bounced around a little bit. I think Fox just said they weren't going to renew them. And they've never commanded big money. It's not a major property. But Man U and some of the big teams have started to gain a foothold. They just played what I think is called the Classic in Miami, which is two of the Spanish League teams for the first time ever played their big game. And Man U is a team that can travel, that can play in other markets.
So they have some growth potential, but it's limited. The amount of people that live in China who are going to become New England Patriots fans, even if football becomes huge in China, it's not the same multiple of what a New England fan living in Boston is going to do in terms of buying merchandise and watching it on TV and paying for various things. So there's a little bit of upside, but there's only so much you can do. It's really more, in a down year, they're not going to do as well, because they're not going to have as many games, they're not going to play in as many leagues and qualify for certain things or get different playoff ticket prices and things like that. And in an up year, there's kind of a maximum. There's not a lot more sponsorship space to sell on that jersey, if you've seen it.
Shen: That's interesting. I think, depending on the sport, but especially for some of these European teams that have more of that worldwide appeal, I think in certain regions, they do still have some room to run. Let's move on to the second part of Frank's question. He asked, "While looking up Liberty's Atlanta Braves tracking stock, I wonder what you all think of tracking stocks in general. Why would a company completely spin off a portion of the company when they could just issue a tracking stock for a particular segment?"
The Securities and Exchange Commission has a short summary on tracking stocks. They summarize it as "a type of common stock that tracks or depends on the financial performance of a specific business unit or operating division of a company, rather than the operations of the company as a whole. Tracking stocks trade as separate securities. As a result, if the unit or division does well, the value of the tracking stock may increase -- even if the company as a whole performs poorly. The opposite may also be true." So, specifically for the Atlanta Braves tracking stock, it's called The Liberty Braves group, that's part of Liberty Media Corp. This is a pretty complicated company structure here.
Kline: Yeah. To get back to part of Frank's question, which is why would a company do it instead of a spin-off, if you spin off a company, you need all separate executives. You need a CFO, you need all that apparatus. So it's a cost-saving measure, because it can still run as a division. You're just breaking out the financials, which you're probably doing anyway, and just giving people the ability to invest only in that part of the business. With Liberty, the Atlanta Braves do not match anything else they own.
Shen: Yeah. At its core, and you really touched on it there, the idea behind these tracking stocks is, it's supposed to open up the books a little bit and give investors a look at the value for some of these individual segments. Specifically for Liberty Media Corp., they have these three segments. One is their Sirius XM stake, their second one is the Braves sports franchise, which we're talking about here --
Kline: Which they only own a piece of, to make it even more confusing.
Shen: And then, they have something called their Formula One Group which, interestingly enough, is made up of stakes in Live Nation, Time Warner, and Viacom -- public companies. So, each of these segments has three tracking stocks, actually, for the different share classes representing the assets of the business. When it comes down to it, in terms of why the companies might pursue this, basically giving investors, without splitting up the company, maybe not so much in this instance, but if a company gets some synergies, for example, from its differing operating units, they can still allow investors to invest or hone in on a specific [segment].
Kline: Right. And realistically, I like Sirius XM. It's a good business, it's a growing business, they have the ability to lower costs as there's less competition out there in the radio world. I don't care for the Atlanta Braves. I would not be interested in owning one piece of stock that includes both of those companies -- they're just not related in any way. So, I don't want the Braves and the potential for baseball rights selling for less, or the team being bad and attracting less fans or getting less viewers on cable. I don't want that to drag down a potential investment -- I don't own Sirius, but I have in the past -- in a company that's a revenue-based subscription model. So, it's really a way for a company that has a strategy, but that doesn't necessarily make sense on a consumer level, to split up and let you say, "OK, these are different things, and I like some and I don't like others."
Shen: Sure. So, the last part of Frank's question that we want to touch on is the reverse side of it. We touched on why these companies would pursue a tracking stock. So, if that's an option out there, why are companies doing these spin-offs at all, and things along those lines?
I think what it comes down to is, your ownership rights are severely reduced when you have a tracking stock. And the thing is, you're investing in, essentially, the cash flows, the assets of that business. But you don't actually get an ownership stake specifically in that. It's in the broader company. And at the same time, you have limited voting rights, and a lot of people find these structures to be very complicated, very convoluted. Frankly, it kind of is, in the case of Liberty Media Corp. There's often issues where people argue that there's conflicts of interest in terms of the management of the three tracking stocks all being interrelated. Whereas, if you have a spin-off, it's cleaner, and often cases, it will be able to bring in more investors who are more comfortable investing in a separate entity and the more simple nature behind that.
Kline: The reason there's not a spin-off is control. Even if you own a controlling interest in the spun-off company, if it's part of your day-to-day operation and there isn't a separate CEO and there isn't a separate board, you just have more control over it. So, in some ways, it's personality. Amazon could spin off AWS or probably three other businesses that they have, but they choose not to. They also don't have tracking stocks. But in theory, they could. It's very different from a retail store, to be selling cloud computing space. So somewhat, it's choice. And I'm not a huge fan of tracking stocks for the reason you just said. I don't actually have a direct ownership interest in the part of the company that I like, and it becomes a little convoluted, and they don't seem to follow the same patterns sometimes. Especially something like Atlanta Braves can follow an emotional pattern, where the stock will go up because the team makes the playoffs, even if the revenue difference in playing one wildcard game and losing is not particularly relevant to the bottom line.
Shen: Sure. So, we've been all over the place, but Frank, our big takeaways here are, in terms of the tracking stocks, you got it from Dan. For professional sports investing, because that's a really interesting area that's kind of unique in the stock market, I think ultimately you're better off going big picture and looking at some of the trends that are related to sports, actually. You might be better off, for example, looking at apparel brands that have a lot of sponsorships with teams. Or, you might be better off looking at broadcasting or entertainment companies that are essentially distributing the content. I will say, though, that the bright side to a Liberty Braves tracking stock, or to investing in Manchester United, for example, is that if you're a big fan of these teams, whatever team you end up investing in, you're going to be more motivated than ever to track the company's progress. And you're going to follow their results all the time. I can see the appeal of that, but at the same time, investing can be as an emotional activity as it is --
Kline: Here's the thing. I think as a novelty, to buy a few shares, the emotional part is great. I'll share a horse racing analogy. Horse racing odds are based on how the betting goes. So if you're at a race like one of the Triple Crown races where a lot of non-racing fans are there placing bets, and there's a horse named after one of the local sports legends -- there was a Captain Messier who ran one year in New York at the Belmont, not in the actual Belmont Stakes, but at that -- and it was a long shot that got bid up to a favorite because it had a name people went, "Oh, it's going to win, it's New York." Came in, like, eighth. And that can happen with stocks where people are making emotional decisions. As I said earlier, I don't think these are great investments, because they're not going to follow the logic of most companies, and that always scares me.
Shen: Yeah. Don't let your love of the franchise overly influence [you].
Kline: Buy a shirt, buy a jersey if you love the franchise. Not stock.
Shen: We have a few more minutes here and I did want to talk about the McDonald's and Domino's stories. Can you give us a rundown? McDonald's really hit it out of the park, if we're going to go with a sports analogy, with their latest earnings. Something that you touched on that you think has been really important to them...
Kline: McDonald's has made some effort to improve obvious flaws in their food. But their big focus has been on process. Everything from kiosks when you order to curbside delivery to eventually automating some of these things, and delivery in an increasing amount of markets. And they won't say that they're doing what Domino's is doing, but I look at it and say they followed a model that Domino's Pizza has done very well. You and I both have eaten plenty of pizza. Is Domino's your favorite?
Kline: If given a choice of six pizzas in front of you, if Domino's was one of them, it would be the last one you ate, most likely.
Shen: Domino's is definitely not my deserted-island pizza choice.
Kline: Right. But the fact is, at 11 at night, you can text a pizza emoji to Domino's and a pizza will show up.
Shen: It's a convenience thing, once you have all your settings established.
Kline: And that's the model McDonald's is working on. They know the Big Mac is not the best cheeseburger available to you in most markets. You can get a better chain burger in a lot of places; you can get a better fast casual burger; you can make a better burger. But the Big Mac can be the easiest burger to get to you, and they are working very hard and spending a lot of money to do that. And I look at it and say, we've talked about this before on the show, a Big Mac doesn't travel well. Chicken McNuggets do not travel well. The idea of McDonald's delivery is absurd to me because the fries are soggy, nothing is good. But in the markets where they've tried it, it's working very well. Sales are going up, people are ordering again, to the point that they're trying to get it to every logical market. There are some McDonald's in business areas where they won't have it because it won't make sense at night. But they're trying to make it so that if you're hungry, you can get McDonald's as easily as you can get Domino's. And that strategy is a better strategy than making your food better.
Shen: Sure. I think we have a company here where, it wasn't that long ago when they saw a huge boost from the introduction of all-day breakfast. Since that stabilized and they saw the boost from that moderate over time, they've been looking for other ways to innovate and keep customers coming in. And the results have borne out that some of their fancier burgers are doing relatively well, some other menu additions. But ultimately, I think, some of these things that you've talked about in terms of emulating Domino's and that convenience factor, and also getting it to customers whenever and however they want it.
Kline: You have to evolve your food. I think the one thing McDonald's learned was they were too stagnant. When everyone else was moving to fresh, and without various things, and cleaner menus, McDonald's spent a long time doing nothing. They've caught up on that. But I don't think they want to fall into the game of Burger King and Taco Bell, with their stunt menu items. If Burger King is throwing out the latest Cheetos whatever, that might work and it might not work. McDonald's does limited edition things, but they're not as gimmicky, so they're not building their business on a huge pop in sales from that type of item. They're trying to build a stable growing model. And when you look, if delivery becomes something that people have the app, it becomes that much easier to keep them ordering through delivery. And I think it's going to work, having looked at the numbers, as much as I don't believe anyone should get McDonald's delivered, or that anyone should ever eat at Domino's if it's before midnight, people are clearly, what was it, 25 consecutive quarters of U.S. store growth, about almost 10% in same-store sales comps this quarter?
Shen: For Domino's, yes.
Kline: For Domino's. This is a company that just continues to add locations and add sales at existing locations, and they've done that by making things very, very easy for customers.
Shen: There you have it. That's all the time we have for today. Thank you, Dan, for joining us, always great to have you here.
Kline: Thank you.
Shen: People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Fool on!