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America: Land of the ... Sports Nut

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Americans are still crazy about their sports, as they watch and attend games in record numbers.  Major League Baseball recently announced that their teams sold a cumulative 74.8 million tickets to their games in 2012, a gain of 1.9% over 2011 sales.  The college ranks are also faring well, with the NCAA reporting that a cumulative 49.7 million tickets were sold to their football contests in 2011, a slight increase over the prior year.  Despite rising ticket prices, the collegiate and professional leagues have created loyal fan bases that are willing to pay up for the entertainment.

Buy a Team

How does a small investor participate in the sports business?  Unless you have a few hundred million dollars in the bank, you probably can’t afford to purchase an entire team.  That might be a good thing, though, since teams are valued at very high multiples to earnings, due to exorbitant personnel costs and a limited supply of franchises.  However, investors can indirectly own a team by buying shares of media conglomerates, including Madison Square Garden (NASDAQ: MSG) and Liberty Media (NASDAQ: STRZA).

The Icon

Madison Square Garden ‘s stock price has enjoyed substantial appreciation since spinning off from former parent Cablevision Systems at the beginning of 2010.  The company is an integrated media business with operations in regional programming, live entertainment, and sports management businesses.  Its key properties include the iconic Madison Square Garden and Chicago Theatre, as well as the Knicks, Rangers, and Liberty professional sports franchises.

In its latest fiscal year, its sports segment reported revenues and operating income of $464.7 million and $13.1 million, respectively, versus the prior year.  The unit’s rebound in profitability was primarily caused by higher ticket prices and strong sales of suites, as well as playoff runs for some of its teams.  However, the segment’s financial results are often volatile and susceptible to work stoppages, including the current NHL impasse.

The Tomahawk Chop

Liberty Media’s stock price has also had a good run over the past year, principally due to the rising value of its 49% ownership stake in Sirius XM Radio (NASDAQ: SIRI).  The company has been attempting to take control of Sirius through majority ownership and is currently waiting on FCC approval of its application.  In FY2012, the satellite radio operator’s profitability and financial position have improved as a result of a rising subscriber base and a $3 billion tax benefit.

Liberty also holds a broad range of entertainment assets, including the Starz video programming business and the Atlanta Braves baseball franchise.  In FY2012, the Braves have reported an 8.5% increase in revenues and the business returned to profitability with operating income of $9 million.  Despite rising attendance and higher ticket prices, though, the segment’s profit margins are very low and success is overly dependent on favorable relations with highly compensated players and their powerful union.

Go Wild

Instead of investing in the teams themselves, investors should look at the restaurants that fans like to frequent to cheer on their favorite team.  One of the top chains catering to the sports crowd is Buffalo Wild Wings (NASDAQ: BWLD).  Founded in 1982, the company runs a national chain of 854 casual dining restaurants that feature 50 projection and flat screen TVs, a full bar, and a menu geared toward its signature chicken wings and sauces.  The company has grown very fast, with a 138.0% increase in revenues over the past four years, as it has expanded its concept around the country.

In its latest fiscal year, Buffalo Wild Wings reported revenues and operating income of $784.5 million and $72.8 million, increases of 27.9% and 29.2%, respectively, compared to the prior year.  Gross and operating margins hit their highest level of the past five years due to a 6.1% gain in comparable sales and the ability to leverage their costs across an additional 85 restaurants.  In addition, the company’s results benefited from the declining price of chicken wings, which dropped to $1.23 per pound from $1.58 per pound in the prior year.

Looking Ahead

In FY2012, Buffalo Wild Wings’ results have been somewhat disappointing with increases in revenues and operating income of 30.6% and 9.3%, respectively, versus the prior year period.  Despite strong comparable sales, profitability has been negatively affected by a 70.1% rise in the average price of chicken wings to $1.93 per pound, which has caused a drop in both gross and operating margins.  However, the company has still generated over $100 million in operating cash flow in FY2012, providing the fuel to further invest in restaurants and expand their base of stores.  Despite a fairly high 25 P/E multiple, the company has only reached half of its 1700 store potential and Buffalo Wild Wings belongs in any sports-crazed investor’s portfolio.

rghanley owns shares of Liberty Media and Buffalo Wild Wings. The Motley Fool owns shares of Buffalo Wild Wings and Madison Square Garden. Motley Fool newsletter services recommend Buffalo Wild Wings. 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!

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