The real Champions League winners
Thought Leadership
The real Champions League winners
Fri 31 May 2019
Football clubs fall into the ‘Consumer Discretionary’ category of businesses. I’m not entirely sure I would want to tell a Cardiff City fan that their support is discretionary. Regardless, football clubs are a fairly niche investment, with business models significantly different from a regular business. After all they have two measures of success which don’t always align: performing well in leagues and cups, and making money.
The costs of acquiring and paying talent often outweigh the prize money that can be directly attributed to that spending. At the same time, don’t spend enough and you can get relegated/miss out on Champions League spots, and so lose out on significant TV revenue. Another quirk of football clubs versus other businesses is that they often list players as assets on their balance sheets. I can’t think of any other industry that lists employees as assets, even if many firms will say that their main asset is their employees! In fairness these are issues faced by many sports, but unlike most sports, there are some listed football teams which means we can analyse these trade-offs.
A list of major football clubs that are publically traded is below:
Lazio (probably a bit more scared of telling one of their ‘Ultras’ that their support is discretionary)
Roma (same)
Manchester Utd (prawn sandwiches – terrifying!)
Juventus
Borussia Dortmund
Ajax
This list may not be exhaustive, and some clubs have listed and since de-listed, for example Tottenham Hotspur. Further as a disclaimer, although I am an occasional viewer of US sports, I’m going to avoid commenting on the (surprisingly few) listed teams there.
A sign that performance on the pitch doesn’t always directly affect the value of a club can be seen in Manchester Utd’s share price (which is listed in the US). They last won the league in 2012-2013, however the current share price is about the same as the end of that season, despite six seasons of relatively mediocre performance:
It is always important to remember that a share price should be based on the expected future profits of the company. The current listing on Manchester Utd only goes back to August of 2012, so gauging a valuation during the ‘glory years’ is difficult. For several reasons, two of which are listed below, this may not be a useful example for football clubs in general:
- Manchester United have always had a huge global following that translates into revenues from areas such as shirt sales which is essentially unmatched. A few seasons of weak performance isn’t going to erode this, and these consistent revenues mean that prize money from winning leagues and cups is less relevant.
- Alex Ferguson had announced at the start of the 2012-2013 season that it would be his last. It is likely that by the time of the listing, markets had already priced in several years of less stellar performance.
Ajax is a useful comparison. Prior to reaching the semi-final of the Champions League it was trading at around €16, valuing it at around €300mln. After winning the first leg and looking highly likely to reach the final, it rallied to €24.7, a valuation of around €450mln. The price promptly fell back to €16 after a shocking turn of events that saw Tottenham Hotspur come back from three goals behind.
The rise and fall in the share price came despite the fact that Ajax would have earned only €15mln extra for reaching the final and a further €4mln for winning it, far less than the €150mln swing in market capitalisation. It seems that markets assign a value to the prestige of winning the Champions league, even if the ability to monetise it isn’t immediately obvious.
Below is the share price for Juventus, which is particularly interesting. For several years the price ambled along between €0.2 and €0.4. Then in 2017 (circled in black) they reached the Champions League final. This saw the value of the football club rise significantly, even though they eventually lost to Real Madrid. However the biggest rise in value didn’t come from winning a competition, but the increased likelihood that they could in future (and that perhaps they could get more shirt sales). Despite having to pay €100mln for Cristiano Ronaldo, and pay him €35mln a year, the share price has soared since the acquisition (circled in deep Portuguese red).
Yes they have won a league title since the purchase, but they had been doing so for several years. This is as sure sign as any that, for the biggest clubs, brand matters more than immediate results. However this argument is circular, since the brand can only be maintained by continuing to win games, and I wonder how much longer Manchester Utd can continue to underperform on the pitch and maintain its premium brand status, and thus market value.
Finally a reminder that sports clubs often represent awful investment opportunities. Unlike many industries where there is a barrier to entry, and thus competition, the whole point of sport is that there is perpetual competition. To stay at or near the top requires consistently high spending, and it only takes one bad season or bad investment and you might not even be in your country’s top tier league. Below is the chart for Lazio’s (or should we say Collapszio’s?) share price. Initially, during the dot.com bubble when global stock values rose to unsustainable levels, an investor would have made some good money. However the shares are now almost worthless. Just don’t tell the Ultras.
As a final disclaimer I support Crewe Alexandra. Profit – we don’t know the meaning of the word.
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A “Black Swan” is a very popular notion in modern stock market commentary, yet the phrase originates from a time before the public listing of stocks. In 16th century London, people used an old Latin quote : “a rare bird in the lands and very much like a black swan“, based on the presumption that […]
Bargain Basement Britain
Over the last month global equity markets have sold off; since the 15th of January the MSCI AC World Index has fallen -4.12%, the S&P 500 -4.22% and the Japanese Nikkei -6.0%. The UK market similarly has tumbled with the FTSE 100 plummeting -6.36% over the last 4 weeks1. With stocks cheaper compared to a […]
Macroeconomic View – German exports accelerating
German exports were weak for the month, up only 0.3%, but are still accelerating year-on-year. Chinese exports were stable, but imports picked up significantly, offsetting last month’s weak data. UK The Markit Services PMI dropped slightly to 53 from 54.2. The Halifax House Price Index year-on-year for the 3 months to January fell from 2.7% […]
Market Comment – Risk on – Redux
After an unusually quiet two-year period, investors were once again reminded that volatility is part and parcel of the investment process. Global stocks suffered their worst week since 2016 and the sixth worst overall week since the recovery began in 2009. More importantly, bond prices also fell, as did other traditionally safer assets such as […]
Macroeconomic View – Market Correction
UK Consumer confidence rose in January from -13 to -9, above expectations for the figure to remain flat. Nationwide housing prices year-on-year for January increased to 3.2% from 2.6%, the highest reading since March last year. The BOE’s concern surrounding borrowing was confirmed as consumer credit figures climbed to £1.52bn in December from £1.5bn the […]
Markets sell-off at fastest pace since 2011
By David Baker, Chief Investment Officer After a strong start of the year for equity markets, global stocks shed almost 5% of their value on Friday and Monday. US equities are now 6.2% below their highs, turning negative for the year, as are global equities (-6.5% from their highs). The S&P 500 is now trading […]
Equity Storm in a (Bond) Teacup
Last week marked a 3.5% pullback for global equity markets, the first since 2016. The move comes after a very good month, January, during which equities rose to fresh highs, gaining 5.2%, prompted by exuberance related to the US tax reform. However, the arrival of February marked fresh concerns for investors. First and foremost, economists […]
Macroeconomic View – Weak US Dollar
Dollar weakness persisted last week as ambiguous messaging from the US Government confused investors. Headline capital goods orders (blue) were robust, however the core capital goods component (red), the less cyclical of the two, has continued to weaken since September. UK Average earnings increased from 2.3% to 2.4% year-on-year for the 3 months to November, […]
Market Comment – Macro headwinds
Last year was very positive, both in terms of stock market and macroeconomic volatility (the volatility of macroeconomic releases). In recent weeks, however, we have noticed a deterioration in macroeconomic releases, especially in the US. Lower inventories and higher imports took a toll on GDP. More detailed data on capital expenditure also shows weakness in […]
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