Investing in America’s Pastime
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Major League Baseball season is in full swing and there are plenty of reasons for fans to be excited about America’s pastime, both on and off of the diamond. This past winter, a number of the sport’s biggest stars changed teams, though this has hardly provided the storyline fans expected. Coming from a Cardinals fan, the struggles of Albert Pujols have provided a personal delight. Nonetheless, most of the ink in the papers – and type in the blogosphere – has been used to cover teams that have been on the wrong side of .500 for much of the past decade. From the emergence of the Washington Nationals’ hothead rookie Bryce Harper to the AL wild card leading Baltimore Orioles, there have been many small-market surprises this season.
But how exactly can we measure if there has been more of a competitive balance this year? One method that can be used is the standard deviation of winning percentages across the entire league.
On the whole, the MLB is becoming more competitive, as the difference between winners and losers has fallen by nearly 20 percent in the past decade. Considering the fact that a full Major League season is 162 games, this means that, on average, the best teams of the early 2000s – think the Yankees and the Braves – had a win outlook between 96 and 103 games. At present day, the best teams must set their sights four games lower, as their win outlook lies between 92 and 99 games. Four games is a significant amount. Over the past ten seasons, the NL Wild Card race has been decided by 4 or fewer games every year. Now, these numbers are determined using the basic laws of probability theory; there are always going to be outliers like the 102-win Phillies of 2011 or the 103-win Yankees of 2009, though one thing remains clear – this is definitely not good news for dynasty-dreaming Bronxites.
From a fan’s standpoint, however, this competitive balancing act has been a blessing. Through the first twelve weeks of this year’s MLB season, total attendance has reached nearly 35 million, and current estimates predict that over 75 million screaming fans will take in a game by year’s end. This figure is a 3 percent jump from the league’s post-recession average, though it is still below the 77.25 million average of the mid-2000s, when biceps were bulging and Barry Bonds’ head was still inflated. Looking at the graph below, it seems that raw attendance data doesn’t tell the entire story, as capacity percentages are actually at 10-year highs.
Rationally speaking, the only way that this could be the case is if ballparks are shrinking. Over the past four years in fact, the Marlins, Twins, Nationals, Mets, and Yankees have opened new stadiums, each having a smaller seating capacity than its predecessor. Specifically, these five stadiums hold an average of 42,000 seats each, which amounts to a 7,000-seat decline per park. With total revenues growing (see graph on left), MLB franchises are becoming increasingly efficient at extracting more revenue per fan (see graph on right).
Interestingly, average ticket prices have remained relatively stagnant – between $26.75 and $27.00 a pop – in recent years. Thus, the logical conclusion is that concession, TV, and merchandising revenues are up. Regarding the former, the graph below shows that the inflation-adjusted price of a small draft beer has jumped over 15 percent in the past half-decade.
And you thought you were the only one who noticed that an Old Style brewski was more expensive. Moreover, TV revenues (+3.6%) and jersey sales (+10.0%) have also been booming in the past year. This begs the question, is there anyway to invest directly in the MLB industry? Unfortunately, there is no ‘Baseball ETF’, though Wall Street’s penchant for financial innovation may give us one eventually. Until then, here are a few stocks that can give MLB bulls exposure to the sport:
V.F. Corporation (NYSE: VFC) is an American apparel company that dates its beginnings back to the turn of the 20th century. It owns a number of popular clothing brands, including Majestic Athletic, the MLB’s official uniform provider. Since 2005, Majestic has been the league’s primary producer of authentic jerseys, jackets and all gear imaginable. In this time, jersey sales have increased steadily, hitting an all-time high in 2010 while maintaining that ground in 2011. There are plenty of reasons for jersey sales to spike even higher in 2012, as 6 of the 30 MLB teams have made significant changes to their uniforms. Most likely, fans of the San Diego Padres, Miami Marlins, Baltimore Orioles, New York Mets, Toronto Blue Jays, and Colorado Rockies will don their teams’ newest threads by Christmastime.
VFC currently trades at a price-to-earnings ratio (17.8X) below the apparel industry’s average (19.8X), and below competitors like Nike at 20.3X, Under Armour at 51.6X, and Gildan Activewear at 26.5X. This undervaluation does not seem warranted, as the company has a higher 3-year average EPS growth rate (13.8%) than NKE (5.5%), while paying three times as much per share as UA or GIL. Going forward, analysts are expecting VFC to finish 2012 with earnings of $9.49 a share, up from $8.04 in 2011. If this consensus holds, fairly valued shares of VFC could rise above $190 by next summer. Heck, even if the stock remains at its current valuation, it could eclipse $170; it currently trades in the $140 range.
As one of the largest media corporations in America, News Corporation (NASDAQ: NWS) owns Fox Sports Net, a group of 19 regional cable TV networks that have exclusive coverage of MLB teams in their areas. With names like “Fox Sports Arizona” or “Fox Sports Midwest,” these networks cover two-thirds of the league’s teams (larger teams like the Yankees and Red Sox have their own stations). The current competitive balancing-act that is occurring in Major League Baseball bodes well for the smaller-market teams that can be seen on Fox Sports Net. The numbers support this argument, as total advertising sales were up 30 percent in 2011, and since the start of 2012, NWS stock has increased over 11 percent. In the first quarter, the company reported a 47 percent jump in EPS from a year ago, with cable earnings accounting for nearly a third of the increase. Analysts are expecting NWS to report a year-end EPS of $1.38 a share, up 20 percent from 2011.
Last but not least, PepsiCo, Inc. (NYSE: PEP), which has interests in just about every junk food imaginable, is the MLB’s official provider of soft drinks and sunflower seeds. In Babe Ruth’s time, these two food groups were the best kinds of “performance enhancers,” and while players these days seem to think otherwise, the two products are still staples at the ballpark. While shares of PEP have remained relatively flat around $68 a share over the past year, PepsiCo executives are employing a “high-growth” strategy in 2012 by introducing a new digital marketing campaign in time for – you guessed it – the scalding summer of baseball season. The company sports a decent 3-year average revenue growth rate (15.4%), though its earnings expansion (7.9%) pales in comparison to Coca-Cola. This may explain why PEP is trading at a P/E (17.0X) below that of its closest rival, though the number is also below its own 10-year historical average (19.9X). Assuming that the company hits its year-end earnings target of $4.09 a share, a breakout above $70 isn’t out of the question.
Aside from America’s Pastime, investors would be wise to monitor the growth prospects of each of the major sports here. Personally, I’m hoping that I’ll be able to get my hands on a ‘Baseball ETF’ before the Chicago Cubs win the World Series. If the Curse of the Billy Goat is any indicator, time may be on my side for this one.
MLB-specific data is obtained from Baseball-Reference, Team Marketing Report, and ESPN.
Fool blogger Jake Mann does not own shares in any of the companies mentioned above.