This Sporting Stock is a Winning Play
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Manchester United (NYSE: MANU) is one of the most popular teams across the globe. Some argue that it has the largest following in the world, and I don't really doubt that statement. I am sure that it is the world’s most valuable sporting company with an enterprise value estimated at about $3.56 billion. Only the Yankees come close to it, at about $1.85 billion.
However, Manchester United does not often come to the minds of investors. It is the direct opposite to stocks like Apple and Google. An earnings announcement would be followed by bulk media coverage for these two tech giants, but not so for Manchester United. But the company has maintained its spot as the most valuable club for seven consecutive years, and shows no signs of slipping despite the heavy debt on its balance sheet. Manchester United’s debt currently stands at 366.6 million pounds, down from about 439 million pounds in 2011.
Most Recent Quarter Results
Manchester United reported results for the three months ending Dec. 31, 2012 on Thursday, Feb. 14. The company’s revenues increased by 8.7 percent to 110.1 million pounds, but operating profit declined by 61.5 percent to 16.2 million pounds, or 10 pence a share, compared to 42.1 million pounds, or 27 pence a share, reported in 2011. The company’s new six dealership agreement contributed significantly to the increase in revenue.
The company’s website stated, “Over 5 million items of Manchester United branded licensed products were sold in the last year, including over 2 million Manchester United jerseys. Manchester United branded products are sold through over 200 licensees in over 130 countries.” Additionally, Manchester United already boasts more than 30 million fans on Facebook.
The company also made significant steps towards improving television-related revenue, after acquiring BSkyB’s one-third stake in MUTV. The company seeks to take full control of its global television channel.
Manchester United reported its fan base to be just shy of 660 million across the globe--this is nearly 10 percent of the total global population. This is no doubt one of the reasons the company sold 5 million items over the last year.
But who else benefits from this massive fan base?
Aon (NYSE: AON) is the prime sponsor of Manchester United’s jerseys, while global courier company DHL has its name on the training kit. The global insurer has indeed benefited from Manchester United’s brand after taking over the sponsorship from American International Group. Manchester United reported a 26 percent surge in commercial profits for the most recent quarter, to 78.6 million pounds.
Aon provides risk management services, insurance and reinsurance brokerage, and human resource consulting and outsourcing services. The company’s December quarter organic revenue grew by 4 percent as compared to 2 percent in 2011. EPS was up 9 percent to $1.27 year-over-year, reflecting both solid operating performance and effective capital management.
The company’s free cash flows more than doubled during the quarter, growing by 243% to $484 million, driven by strong working capital performance. This resulted in an annual growth rate of 48 percent to $1.2 billion in free cash flow for the year.
Nike (NYSE: NKE), the global sportswear manufacturer, is expected to shell out loads of cash as it seeks to extend its association with the English club. Manchester United is reportedly eyeing an improved deal with Nike that could stretch as far as one billion pounds. Reports suggest that the company is slated for 6-month period of negotiations for an additional 303 million pounds for kit supply.
Over a period of five years, that is the 2007/2008 season to the 2011/2012 season, Nike shipped 1.4 million Manchester United football shirts across the globe, a figure replicated by Real Madrid for Adidas. This is a good example why Nike will likely fight to keep its place as the Club's shirt sponsor for the foreseeable future.
Nike's F2Q13 revenue grew by 7 percent to $6.0 billion, up 10 percent on a currency-neutral basis. Its gross margin was down 30 basis points to 42.5 percent as benefits from pricing actions and eased material costs were offset by higher labor costs and unfavorable changes in foreign exchange rates. Diluted earnings per share increased 11 percent to $1.14.
Manchester United is also reportedly reviewing an offer from an unnamed partner, which is expected to result in an 8-year sponsorship deal for its training kit. Manchester United also closed six other deals in 2012:
“Kansai and Singha (global; headquartered in Japan/South Africa and Thailand), Wahaha and Multistrada (regional; China andIndonesia respectively); and China Construction Bank and Denizbank (financial services; China andTurkey respectively).” This is an indication of the company’s global network, which should guarantee competitive sponsorship deals in future.
Manchester United is an attractive stock, but its high level of debt will dissuade some investors from taking long positions. Nonetheless, the outlook remains bright. Indeed, I believe that Manchester United's revenue potential is bound to improve with the current campaign.
Manchester United Football Club sits twelve points clear at the top of the Barclays Premier League, with 12 games to go. The club also qualified for the UEFA Champions League, and stands a chance to get to the quarters. Additionally, Manchester United has already qualified for the Football Association (FA) Cup quarterfinals. These are great achievements as compared to the previous campaign, when it won nothing and exited the cup competitions at early stages.
Nmaithya has no position in any stocks mentioned. The Motley Fool recommends Aon and Nike. The Motley Fool owns shares of Aon and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!