Does It Make Sense to Invest in a Company With Its Name on a Stadium?

In this podcast, Motley Fool hosts Ricky Mulvey and Dylan Lewis discuss:

• Why stadium sponsors generally don't outperform their peers or the market.
• When major sponsorships do and don't make sense as part of a marketing budget.
• Monster Energy's brilliance in focusing on extreme sports. 

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sep. 03, 2023

Ricky Mulvey: What I've learned from this is I would not suggest setting up a hedge fund that is completely based on investing in companies based on stadium naming rights. There might be other factors at play.

Dylan Lewis: I'm Dylan Lewis, and that's Motley Fool Money's Ricky Mulvey. The NFL season kicks off this week with the reigning champion Kansas City Chiefs taking on the Detroit Lions on Thursday Night Football. As you ready yourself for Sundays on the couch and a montage of advertisers coming into your living room, we ask Ricky to zoom in on the world of NFL sponsorships and set up an experiment to see how the names you see plastered on stadiums stack-up as stocks. Ricky, you took a look at the NFL stadium sponsors and their performance relative to some of their peers in the market. I think a lot of us have wondered as we've seen names on the side of stadiums, OK, is that an interesting, investable idea?

Ricky Mulvey: It's certainly interesting. In my mind, there are some stadium deals that make a lot of sense. Which is you have a large consumer product brand that you want widespread awareness for. Maybe an easy one would be Gillette razors with Gillette Stadium. Then there were question marks for me around like MetLife, which sells group disability insurance, regional banks with M&T, even in my hometown of Cincinnati, Ohio, human resources software platform Paycor deciding that they wanted to really get their name out there by sponsoring the Bengals home field. I wanted to know if this was a good investment or if this was a group of folks in a boardroom that wanted to press a big red button that says buy stadium rights, so I set up two hedge funds. One hedge fund will call Dylan at the stadium hedge fund. Every time a stadium rights deal is announced, this fund buys $1,000 worth of stock in the purchasing company. They think that buying the naming rights to a stadium is a great investment because you're getting brand awareness. One factor that a lot of people don't talk about is that you're aligning your brand with these beloved hometown teams. You get that positivity. You're going to get organic press that's associated with being a part of this professional sports franchise. That's well worth the millions of dollars that you're paying for, and you know, a lot of those money nerds can't really account for that. Then we have a second group. This is what I'm calling control group hedge fund. This is the personal enemy Dylan, of the stadium hedge fund. They think that this theory is bogus, so every time a company bought naming rights, this fund invested $1,000 in the broader ETF that the company belong to. So for Raymond James, it would be like a financials mutual fund. In the case of Lumen out in Seattle, they bought VGT, the Vanguard Technology Fund. Occasionally, it will have to use the SPY, Standard and Poor's 500 fund, just because they couldn't find an appropriate matching fund on the date that those naming rights were purchased.

Dylan Lewis: I appreciate you doing the dirty work and going into the industry-specific comps there.

Ricky Mulvey: Yeah. We'll talk about the comps to the S&P 500, but I think it's more fair to compare them against their peers. At first glance, you have these racehorses, Dylan. How do you think this would go?

Dylan Lewis: There are a lot of pretty established names and brands that are stadium sponsors and you have to have peer business of a certain size, so there's a part of me that thinks that it wouldn't be overwhelming in one direction or the other, but that it'd be it depends on how you look at it.

Ricky Mulvey: It does depend on how you look at it. Here's what we found. Stocks won, just four times, ETFs won, 14 times. But the total return, in my opinion, was significantly closer because the ETF fund with these $1,000 bets each time had $59,000 in mid-August when we tracked the dates and the stock Group had 52,000. The number of winners overall larger in the ETF group, but the total return a little bit closer. That's because, Foolish investing principle, one big winner can make up for a lot of losers, and in the case of this horse race, it would be Raymond James financial.

Dylan Lewis: That's something we see often in our own portfolios. What I think I also would guess, I don't know the exact dates with Raymond James, but that is a longtime sponsor of the stadium, so we're looking at long-term returns for that hypothetical $1,000 invested.

Ricky Mulvey: Yeah. There's a little bit of survivorship bias in here, so most of the stocks that outperformed three of the four bought the naming rights 20 or more years ago. That includes Raymond James, FedEx, NRG out in Texas. The only one that was a winner on a more shorter-term basis, and this surprised me because it's another question mark of why would you buy a stadium naming rights, is Allegiant Airlines out in Las Vegas.

Dylan Lewis: Trying to build awareness, Ricky. What can you say?

Ricky Mulvey: When you're buying plane tickets, let's say to go to Las Vegas even, Dylan, are you looking at any name brand association or are you looking for the cheapest flight possible? This is a complete commodity industry that's 1,000% determined on price.

Dylan Lewis: Cheapest possible, every time.

Ricky Mulvey: But you know what? I think their marketing people might know something I don't.

Dylan Lewis: That was the industry comp. What do we see when we compare these companies to the broader S&P 500?

Ricky Mulvey: They got smoked for the most part, both on a comparison basis and on a total return basis. Just two of these companies beat the broader market, and the broader market generated about $75,000 while the stock group generated $52,000. So in a lot of cases, the S&P 500 index funds take the wind here.

Dylan Lewis: Yeah. The index fund is undefeated for a good reason. It's generally one of the best ways to put money to work so we take that step back and just look at the high-level takeaways here, Ricky. The stadium sponsors in the NFL of the publicly traded ones, like there's about 19, generally underperformed industry indexes or ETFs and broadly underperformed in the market.

Ricky Mulvey: Yes. What I've learned from this is I would not suggest setting up a hedge fund that is completely based on investing in companies based on stadium naming rights. There might be other factors at play.

Dylan Lewis: For what it's worth, other financial observers have also observed this phenomenon. There was a column from Morningstar in looking at results 2002-2022 at major sports stadium sponsors. They had a lower survival rate than the Top-1,000 stocks, though they were better than the entire market, and majority of the sponsors in that study underperformed the Vanguard Total Stock Market Index. So we are confirming results that have been seen out there before.

Ricky Mulvey: Yeah. I think a major case, and this as well as it's a lot of what I would say mature consumer goods companies which tend to be at best in line with the S&P, or as we may explore later, maybe smaller cap companies that have question marks about whether or not they can afford these naming rights deals, to begin with.

Dylan Lewis: Yeah. I think that's a good point. You have to be probably a mid or large-cap company for any of these deals to be reasonable based on your marketing budget. We go back to the early odds and some of these deals are in the low single-digit millions. But more recently, we are talking about deals that are costing 10, 15, 20 million dollars a year if you average out over the life of the deal. That's pretty expensive for a company to stomach and it's probably not within the marketing budgets of most small-cap companies. It's probably most of their marketing budget for a business that size.

Ricky Mulvey: Yeah. If you look at the case of SoFi, I think that is what I would describe as an interesting bird. They're spending more than $30 million a year for SoFi Stadium naming rights in Los Angeles granted. They've got a couple of NFL teams there playing there, so maybe they're getting two for the price of two. But when you look at the financials of this company, this is one that has no branches and yet its non-interest expense is consistently higher than its total revenue.

Dylan Lewis: Yeah, it's interesting to think about the way that this fits into the overall financial picture for some of these companies. I think on the flip side, something I'm struck by looking at the names and the terms of some of these deals is Ford paying $2 million a year to have their name on the Detroit Lions Stadium. They spent $2 billion a year in advertising. If you think about it from a capital allocation standpoint, the feel good of being locally invested, being named on television every time the home team plays that is well worth $2 million a year.

Ricky Mulvey: Thought about it more with especially some of those regional banks like M&T. It does make sense or in Denver we have Empower, which is spending an estimated $6 million a year for empower field mile high. These are companies that really want to be associated with the community and they are more than happy to absorb the costs of maybe the extra spend that you have to pay for in order to have your name attached to a stadium. But while it's a small spend for a lot of these mature companies, I did think it was interesting to look at the general return on invested capital for these names, especially compared to the broader S&P 500 because maybe this is a way of addressing, hey, how good are these companies in investing large amounts of capital? Now, the ROIC number doesn't necessarily just capture marketing spend. It's how well a company generates profit against its invested capital, book value of equity, debt, leases, that thing, but for a lot of these companies buying stadium, they're making fairly large or at least extremely visible long-term investments, and when I, let's say stuck my finger in the wind to see what was going on, just two of them in our group have higher return on invested capital numbers than the market average. Those two being Procter & Gamble, which has Gillette Stadium, and Raymond James. If you want to include Levi's, which went public a long time after the stadium rights deal that it signed, we can include Levi's as well. But I'm curious to hear what you think about the still or do you think that this reveals anything about these companies making these long-term decisions with stadium naming rights or is it just really hard to beat a market average?

Dylan Lewis: I think it's hard to beat the market average, and there are some limitations here at what we're looking at. This is a class of about 20 companies that we're examining. Sample size is probably below where we need to be for statistical significance, but I think they're observable trends. I think for me, what's interesting about this, as you think about capital allocation and business decisions is this is something that management teams are prioritizing at a pretty decent sticker price. For some of these more recent deals, there needs to be pretty good alignment between what someone is trying to do from a marketing perspective and how they generally acquire customers and that spend, and so I think I look at it like a major financial product type company, it make sense. You want to be familiar as people are making decisions that they don't make all that often, maybe being fresh in people's minds. It doesn't make as much sense for me for some of these other brands and I think we see that born out. It seems to me almost like something that management companies are willing or interested to do when cash is a little bit more abundant.

Ricky Mulvey: That would make sense. It's easier to hit the big button when you have a little bit more, when it's a little bit easier to either raise money or you're generating more profits. I want to talk about some of the flaws in the research those you've already rightly picked out that there's a small group of companies involved in this because part of the reason is that a lot of the teams that sponsor stadiums in the NFL are not publicly traded. But I do think it's worth talking about because anytime you have research, you want to poke holes in it and say what went wrong. In the first case with this group of stocks, it's really hard to find a comparison for companies that made these deals in the 1990s or early odds. There weren't a ton of ETFs then. One that I looked at for some of the car companies like Nissan is called CARZ C-A-R-Z. When Ford signed its deal in 2002, that ETF wasn't around. The other case is that companies spend money in lots of different ways besides naming stadiums. In the case of Procter & Gamble, they spent a lot of money on marketing, not just buying the rights to Gillette Stadium. Maybe that's not the best way to judge a consumer giant like that, and then we also have survivorship bias in this. I'll name some non-NFL stadiums, but among the long-lasting deals. These are companies that have been around for decades and decided, you know what? This is a good investment because they've resigned, Raymond James, M&T bank being a number of them, but there are companies occasionally that by stadium naming rights and then some things happen. In the case of the Houston Astros, they used to play at Enron field and who could forget FTX arena down in Miami where the Miami heat played. Those two companies have fallen on hard times due to circumstances completely outside of their control, so they no longer have the stadium rights, but this is one of those cases where you're going to see that play out in the research.

Dylan Lewis: Yeah, I do think it is interesting. There's an odd pattern to that, and it's something that doesn't come up too frequently, but when it does, it comes up in a way that really lends itself to schadenfreude type headlines for some of those splashy names. I think FTX in particular got a lot of play on the Internet as a corporate sponsor, and I think there's this feeling when you see the name of a business on the side of a building that there's some splash at the management team is looking to make that goes beyond your standard marketing efforts.

Ricky Mulvey: And I think, you're buying legitimacy. So it's that positive association you get from being associated, let's say FTX in the case of the Miami Heat. You have a lot of brand loyalty in years of fandom for a lot of the Miami Heat fans who enjoys showing up in the second half of games, but in that case they know what they're paying for and there might be a little bit of shenanigans associated with it. The biggest flow on the research though, Dylan, I want to talk about, is that in some cases, publicly traded companies do not want to reveal what they are paying for for this stadium naming rights. Sometimes they disclose the extension cost, but you don't know the terms of the original deal. However, there is one that really stands out to me right now. It's with Cincinnati Bengals play it Paycor Stadium. If you will indulge me, Dylan, I would like to go down a rabbit hole about why Paycors Stadium naming rights deals is not public.

Dylan Lewis: I'll indulgent. Yeah, go ahead.

Ricky Mulvey: All right. So in the case of the Bengals, we don't know the terms of the deal because they have not shared it with the public. Hamilton County actually owns the stadium in which the Bengals play in. However, the Bengals have asserted attorney-client privilege with regard to the exact deal they have with Paycor. This is a big deal because part of the contract is that Hamilton County is supposed to have a rev-share when it comes to stadium naming rights if it hits a certain bar. According to WCPO in Cincinnati, the original lease states that the Bengals are entitled to retain the first about $17 million from the sale of naming rights plus 70% of any revenues in excess of that. Meanwhile, Hamilton County attorneys believed that the deal is worth more than $100 million. Here's where we go further down the weeds, the Bengals refusal to make the terms of the deal public is allowed under the lease that they signed in the year 2000.

Ricky Mulvey: What I'm hearing is there a lot of complications around the stadium. Situation for your beloved Cincinnati Bengals. I look over at MetLife Stadium where my New York jets play and I say, you know what? Not only do they get to play host to one of the most important franchises in the NFL. They get twice as many games as any other corporate sponsors and the giants play there. I'm sure it's priced into the contract. I'm sure that was known for negotiators on both sides of the table, Dylan. Paycor Stadium was also supposed to have an MLS team play there. That didn't exactly plan out. But anyway, I want to move on to a broader discussion about awareness marketing. I want to put this to you. We've talked about awareness marketing from terms of stadium naming rights. But a lot of companies do this. This is the top of the funnel. Are there any companies, when you think about this, that do it really well?

Dylan Lewis: Yeah, I think what's hard about stadium sponsorships is they're an incredibly blunt marketing tool. You get your name put out there in a way that's mass broadcast and mentioned a lot on TV. But aside from people generally being interested in the sport and maybe the regional attraction of people that are in a certain area or from a certain area, you don't really know a heck of a lot more about the people that are seeing those brand placements. I think it's interesting when you look at the type of businesses that tend to do it. We've noted that there are not a lot of like big time tech companies in the mix here. They clearly have a very different customer acquisition strategy than some of these companies. I've wondered, do the marketers feel like the trade-off here is worth it? In some cases, I think it's easy to make that case. The Ford Field sponsorship, for example, being $2 million a year as we've talked about. Just an easy one for them to say, yeah, that's worth us doing. But I've always felt like it's not necessarily a bad sign that a company that you're invested in wants no part of this world. Because it's a less specific, less targeted, and probably more expensive per customer way of attracting new people to your business.

Ricky Mulvey: Fair enough. I think there are companies that do awareness marketing extraordinarily well, and usually they have a very clear and specific vision of who their customer is. I think the poster child of this would be Monster Beverage Corporation. They have very specifically aligned themselves with motocross, dirt bikes, professional bull riders. The ultimate fighting championship stock's been done tremendously well. I think it's the best returning stock over the past like 30 years or something. The energy drink makers return on invested capital, even today, is about 20%, and that's on the low end of historic averages. This is a company that knows who's buying its energy drinks very well and they know what media they consume.

Dylan Lewis: I think there's clear alignment there in product and audience in a way that I think is tougher when you get more to the big four sports and the mass broadcast sports. I think, when you're operating in some of the second tier sports and activities, you're going to get a more qualified audience that you're marketing to.

Ricky Mulvey: It's a niche sport. It's not second.

Dylan Lewis: You know waht? I'm going to direct all of our angry motocross emails to Ricky Mulvey.

Ricky Mulvey: We're going to put Dylan Lewis on a bull, see if he can make it for 10 seconds, and then you can tell me if that's a second tier sport. We're going to show more respect to the Professional Bull Riders association.

Dylan Lewis: Only an audience, not in what it asks if its athletes, Ricky. [laughs]

Ricky Mulvey: I will get off my soapbox. But to your point about big tech, it's because in a lot of cases they're playing a different game. Apple, Amazon, and Alphabet, all have deals with the NFL, but all is with regard pretty much to streaming. Apple, I would say has the smaller deal yet the scope of this, which is that they own the superbowl or they sponsor the Super Bowl halftime show is a promotional lever for Apple Music. Amazon recently got the rights to stream Thursday Night Football, and one story that I don't think is getting talked about enough is that YouTube has NFL Sunday ticket. They are spending two-and-a-half billion dollars annually for seven years to show folks out-of-market games on their favorite streaming device.

Dylan Lewis: I think if anything, Ricky, that's proof that if you're looking for investable ideas in the grand scheme of professional sports and the affiliated companies, maybe look outside of the name that is on the stadium itself and look at some of the other players in the space. Because a lot of these big tech companies have correctly identified the value of these broadcasting rights and the new age of streaming. They've been very quick to put some pretty big deals together with these pro sports franchises.

Ricky Mulvey: In the case of YouTube and Alphabet, DirecTV had NFL Sunday ticket for many years prior to that deal. Alphabet was able to come in and say, you know what? We'll spend a billion dollars more per year to stream these games. No problem, don't worry about it. They have the money to make that move. You know what? If it proves to be too expensive, if it doesn't work out for them, I think Alphabet might be OK if this bet doesn't work out.

Dylan Lewis: Yeah, I think they'll figure it out. It is a Ford-sized bet. To go back to what we were talking about before. I do think there are probably some other places to look in pro sports. If you're looking for interesting investable ideas. We've talked about it at length on the show before, but Live Nation with Ticketmaster just continues to be an absolute monster in the live events space, and that's not going to change anytime soon.

Ricky Mulvey: Deidre and Alicia Alfiere just did a good medium dive on Live Nation earlier this week. It's such a weird valuation story to me where the forward PE is above 80, but the price to free cash flow for Live Nation is about 13 times. This has been a tremendous adoption story as well. Where before the pandemic, I think it was less than 10% of tickets that got you into an NFL game were digital. Now it is more than 97%. Ticketmaster not only owns the original marketplace for tickets, but in a lot of cases, the resale market as well. If you want a vertically integrated company, there you go.

Dylan Lewis: I'm going to throw a bone to Cincinnati with this one and say, there's another name that came to mind for me as we were looking for other investable ideas in the space, and that's Cintas. They are probably the provider of most of the uniforms and clothing that people in the arena are wearing, that are working concessions, working services. They are a company that has performed incredibly well over the last three, five, 10 years. They're one of those businesses you've never heard of, but just operate in churn out money.

Ricky Mulvey: They also, I don't know if you know this, but they do sponsor an arena.

Dylan Lewis: They do.

Ricky Mulvey: They've taken a little bit of a smaller stab at it. However, the Xavier Musketeers play at the Cintas center in Cincinnati, Ohio. They've given themselves a little bit of leeway for sponsorship for a school that they're proud to be associated with. But it's probably not quite the deal of putting, slapping your logo on an NFL stadium.

Dylan Lewis: We'll save that for a follow-up episode maybe, be college sports sponsorship paradigm, and dig into some of those lower price deals, Ricky.

Ricky Mulvey: There you go.

Dylan Lewis: Dylan Lewis. Appreciate it. These is sponsors. Ricky, great talking with you.

Ricky Mulvey: As always, people on the program may own stocks mentioned in the Motley Fool may have formal recommendations for or against them, so don't buy or sell anything based solely on what you hear, and listeners, if you have a fun way for us to look at stocks, we want to hear it. We're always looking for episode ideas. If you've got one shoot us a note at [email protected]. A quick programming note, we'll be enjoying the Monday Labor Day break, but we'll be back with episodes on Tuesday. Until then, Fool on.