Stock Evaluation Report of Manchester United PLC

This essay was written as part of final year studies in University College Cork. 

Class: EC 3119 Capital Markets and Asset Valuation 

Grade: 1st Class Honours 

Introduction of Company 

Manchester United plc, together with its subsidiaries are the owners of Manchester United Football Club which is located in the United Kingdom. In 2017 the franchise was and still is one of the world’s most recognisable sporting entities, making it one of the world’s highest earning sports teams. In fact, the franchise ranked as the 3rd highest valued sporting franchise behind the Dallas Cowboys and the New York Yankees in the world across all sports. (Forbes 2017) This makes the club which was founded in 1878 under the name Newton Heath the most valuable sports franchise outside of the United States of America as well as the most commercially successful football club in the world. The club is owned by an American family known as the Glazers. The takeover of the franchise was a gradual one, but by the end of May 2005, the family owned 98% of shares. Since the acquisition, the clubs revenue has skyrocketed. Much of this is due to TV and sponsorship revenue. This sponsorship includes £361 million over seven years from Chevrolet, £120 million from Aon over eight years and £750 million from Adidas over ten years. However, the family has come under criticism from fans and the media alike for burdening the once debt free club with such amounts to pay back. A debt that would reach its peak at £777.9 million. (BBC 2015) The main franchises liabilities come from wages of the playing staff. This includes Alexis Sanchez who earns £350,000 a week while Paul Pogba earns £290,000 a week making them the two highest earning footballers in England. (Daily Mail). In this piece, I will estimate the fair value of the company using different financial models. Describe the economic/financial data of the franchise and finally ask the question of whether the franchise is worth investing in or not.  

Focus on Stock Description

The following data was collected from Yahoo Finance on March 15th, 2018. Manchester United plc (MANU) was first floated on the NASDAQ New York stock exchange on the 10th of August 2012 and has remained a constant figure to this day. On that day stocks opened to the floor at $14.05. As of March 15th, 2018 stocks are available at $20.00. This increase can only be expected with the increasing about of money coming into the game of football as mentioned above. Over a 52 week period, the stock has seen a 20% change in value, seeing the stock reach a yearly low of £15.86 and a high of £22.15. These fluctuations are understandable. Manchester United PLC appears in both British and international newspapers on a daily basis for both positive and negative reasons. Public opinion on how a sporting franchise is doing can change more often than other industries, and this will naturally affect the stock price. Despite this, the 200 days moving average of the stock is $19.19, while the 50-day moving average stands at $19.54. This along with the fact that the stock was valued at $20.00 on March 15th, 2018 would suggest that the stock is a bullish stock rather than a bearish. The stock at a bare minimum is keeping in line with its 50-day average. Finally, according to the Manchester United 2017 financial report, the weighted average number of shares is 164.025 million with the basic earnings per share (EPS) standing at £23.88 or $33.76. 

Wider Financial Description 

The following information comes from the 2017 Manchester United financial report. The information will be given in British Sterling. (Fig 1-3). Ending in the year of June 30th, 2017, the revenue of the franchise stood at £581.204 million. This can be broken down into commercial activity which includes the selling of merchandise (£275.471 million), broadcasting from companies including Sky and BT (£194.098 million) and match day revenue from ticket sales at (£111.635 million). With the total operating cost standing at £511.315 million which gave the franchise profits of £39.177 million in the year ending June 30th, 2017. The total assets of the club have a value of over £1.5 billion while the liabilities stand at over £1.056 billion. This means the total equity at the club is £477.617 million which is a decrease from 2015 and 2014.  As this report already mentions, when the franchise was taken over by the Glazer family, the franchise accumulated in a lot of debt. This has resulted in significant amortisation fees. In 2017 the club paid out £124.43 million in such fees. While the club is capable of paying such fees/loans with a revenue stream of £581.204 million, such loans are and will continue to be a constant reason of worry for everyone involved as well as potential investors in the future with this number tending to rise with each year. In June 2017 the Interest Before Earnings, Tax, Depreciation and Amortization stood at £199.898 million, increasing substantially from previous years.

Estimating the fair value of the share price and explaining why the model is used. 

Model 1

As already mentioned the market value of the Manchester United PLC stock is between $19 and $20. If I decide to use the 200 days moving average, it stands at $19.19. While this is seen as the market value, it is not necessary the fair value of the stock. The first model I would like to use is to calculate the average return of the stock. This will be done by calculating the average return of the stock over a 12 month period. The purpose of this calculation is to measure the stability of a stock. The less that a stock return varies, the more stable the stock is. This is calculated as follows;

Fig 1: 

P1 = Previous Month

P2 = This/Most Recent Month

D12 = Dividend paid at each period. 

See working outs from figure 4-6. 

Model 1 Analysis 

On average over a 12 month period, the average percentage return on Manchester United PLC stock is + 1.27%. This period sees highs of 16.1% (November 1st, 2017) which a low of -4.62% (December 1st, 2017) This is a considerable variation in return making the stock very unstable. The public opinion of a football club can change very quickly, and this can affect the stock price. The clubs strong stock price increase in November 2017 was a result of a positive number of results for the first team in October 2017. This included five wins from six including two wins in the Champions League which is played on a European scale. (Manchester United Fixture List) While on the other hand in November the first team lost two of their five games including against rivals Chelsea. To further back this theory, the share price value increased 9% on September 1st, 2017. In August the 1st team won their opening 3 Premier League games convincingly with the total £147.96 million pound investment in Romelu Lukaku, Nemanja Matic and Victor Lindelof looking like positive business. (Transfermarkt).There is a very clear correlation between results for the first team and the value of the Manchester United PLC stock price (MANU). I believe this evidence makes this franchise a very risky investment as one mistake on the pitch or referee decision can alter how a month is interpreted. A club of this size is expected to win the Premier League, but with United trailing Manchester City by 16 points this hope is a long way. This gap could potentially limit how positively the franchise could be seen for the next few months or even years and therefore affect the stock price negatively. The club says as much themselves in their 2017 annual report stating ”our dependence on the performance and popularity of our first team” is a “factor of influence” (Manchester United Annual Financial Report) 

Model 2:

See calculations in Fig 5

If we compare the total revenue for Manchester United PLC in 2013 (£363.189 million) and 2017 (£581,204,000) we can see that the revenue has increased by just over 60% in four years. With the exception of 2015, the club recorded increasing revenue from one year to the next. In 2014, 2016 and 2017 revenue change changed within a 1.5% range. Between 2014 and 2017 the average increase in revenue was 4.75% with 2015 dragging this figure down from 6.4% based on the other 3 years. 2013 brought with it, both the highest level of % profit as well as the lowest total revenue. 

Model 2 Analysis

Despite revenue increasing overall the revenue took a sharp dip between June 1^st2013 and 2014. May 2013 saw the retirement of long-standing manager Sir Alex Ferguson. While under his 26-year stewardship the first team never finished below 3^rdin the Premier League. But come May 2014 the club had finished 7th, its lowest position in over 20 years. While revenue increased, employee benefit expenses also increased as the club tried to return to glory with big money signings and higher wage packages. This increase in costs reduced overall profitability despite increasing revenue. The safe running of this business financially is very dependent on the first team performances. It is no coincidence that the club recorded a loss after the season in which they did not take part in any European competition and therefore did not receive this source of revenue from UEFA. (UEFA Revenue Distribution)

Investment Strategy

As already mentioned Manchester United PLC revenue exceeds its cost. The stock price does jump up and down but overall from one financial year to another it is increasing. It is in a position to pay a dividend. It is a business with a global appeal, higher than most including firms from both the world of sport and not. The club has many valuable assets such as their 76,000 seater stadium Old Trafford as well as a very talented playing staff with potentially high selling value. Due to the fact they are part of the Premier League and have signed many long-term sponsorships deals a certain level of revenue is guaranteed. On the other hand, potential investors of the club would need to accept constant public scrutiny as well as pressure to invest. The world of football is in a period where wages and transfer wages are rising exponentially. With the four most expensive transfers in football history happening in the last two years. (Independent 2018). While these are risks at any football club, Manchester United have more debt than any football club in Europe at £464 million. (Independent and UEFA). With only 0.47% of shares floated, even if one investor bought all the shares, they would have no say at the club. (Market Watch).  Any takeover bid would likely be strongly resisted with revenue increasing each year. Realistically if someone wanted to take over the club, they would need to pay somewhere north of the market value of $3.14 billion reported by market watch due to intangible benefits such as publicity. Mike Ashley and his company Sports Direct with their ownership of Newcastle United is an excellent example of using a football club to improve the brand of another business. Any investor in Manchester United PLC would also need to take on all the debt of the club and have the constant pressure from millions of people to invest in the playing staff. It would be near impossible to make a profit. As a financial investment advisor, I would recommend both small and large investors not to invest in the stock of Manchester United PLC (MANU). 

Reference List: 

BBC 2015: http://www.bbc.com/sport/football/32615111

Daily Mail: http://www.dailymail.co.uk/sport/football/article-5301837/Alexis-Sanchez-goes-Premier-League-wage-table.html

Forbes 2017: https://www.forbes.com/sites/kurtbadenhausen/2017/07/12/full-list-the-worlds-50-most-valuable-sports-teams-2017/#2fa73c814a05

Independent and UEFA https://www.independent.co.uk/news/manchester-united-debt-uefa-report-european-club-football-landscape-qpr-glazer-family-a7523761.html

Independent 2014 https://www.independent.ie/sport/soccer/10-most-expensive-footballers-in-history-36464026.html

Manchester United Annual Financial Report: http://ir.manutd.com/financial-information/annual-reports/2017.aspx

Manchester United Results: http://www.manutd.com/en/Fixtures-And-Results/United-Fixtures-And-Results.aspx?pageNo=1

Market Watch https://www.marketwatch.com/investing/stock/manu

Transfermarkt:https://www.transfermarkt.co.uk/manchester-united/alletransfers/verein/985

UEFA Revenue Distribution:https://www.uefa.com/uefachampionsleague/news/newsid=2398575.html#/

Yahoo Finance Historical Data: https://finance.yahoo.com/quote/MANU/history?period1=1344553200&period2=1521417600&interval=1d&filter=history&frequency=1d

Biography 

BBC 2014 Why buy a Football Club: http://www.bbc.com/news/business-26365955

Blackwell Publishing: http://www.blackwellpublishing.com/content/GrantContemporaryStrategyAnalysis/6th_Edition/case_teaching_notes/CSA6CaseNotes_06.pdf

Figures and Graphs 

Fig 1

Fig 2

Fig 3 

Fig 4 

Fig 5 

National Team and League; What’s the Connection? Part 2

Diarmuid Gillingham

Twitter- @ThisIsDiarmuid

Leading on from what we read at in part 1, which you can find here In part two I will examine the effects of population on the standard of club and national football in a country as well as examining the correlation between economic prosperity and success on the football pitch. Finally, both part 1 and 2 will be summed up in a few conclusions at the end. But first of all, the effect of foreign players in leading national leagues will be examined. 

 

Effect % Of Foreign Players In Leading National Leagues.

 

With the recent success of both Spanish clubs and in particular the national team it should come as no surprise that out of Europe’s top 5 leagues, La Liga has the fewest % of foreign players at 42.8%. While England and Italy whose national teams have struggled in recent times have the highest % of players playing in their top leagues at 69.2% and 55.5%. Surprisingly 49.2% of players in the German Bundesliga are foreign, placing them smack in the middle of Italy and Spain.  In terms of Europe’s top 5 leagues there is a clear correlation between the success of the national team and the number of foreigners in a league. To put it bluntly, less foreigners means a stronger national team. Outside of Europe’s top 5 leagues we must have different expectations. In club leagues with lower standards such as Belgium, Portugal, Austria and the Czech Republic their national teams are helped if their players move abroad to the top 5 leagues. Players get to play against the best domestically and in the Champions League which is a huge advantage when major competitions such as the World Cup come around.

 

 

 

 

Effect of Population On The Standard Of Club and National Football

 

Bigger populations tend to mean more players and more investment which means more quality players, which means a better standard. Although this is not always the case, take the United States for example. The US failed to qualify for Russia 2018 despite having a much bigger population than their qualifying opponents. On top of this the national team sits 25^th in the current FIFA rankings. While Major League Soccer has improved in recent years, it is unlikely to ever reach the heights of Europe’s top 5 leagues, despite these countries having smaller populations.

 

It is interesting to note according to UEFA rankings, Europe’s top four leagues are La Liga (Spain) 1st, Premier League (England) 2nd, Seria A (Italy) 3^rd and Bundesliga (Germany) 4^th. But these four nations are in the opposite order in terms of population. Germany 80.67 million, Italy 60.6 million, England 53.01 million and Spain 40.56 million. These four countries have some of Europe’s biggest populations. With a population of 45 million, just a million short of Spain, again it could be said that the both Ukrainian national team and club league under perform. Countries with relatively small populations and over achieve include Switzerland whose national team have a world ranking of 8^th.

 

Dose The Standard Of Living Have An Effect On The Success Of The National Team?

 

In extreme cases yes. Countries such as Germany and France have very high standards of living and they have both strong national and club football leagues. While on the other hand countries such as Uganda have a relatively poor standard of living and is not known for its high standards of football to say the least. But there are exceptions on both sides. According to the World Economic Forum the five countries with the highest standard of living are; 1^st Norway, 2^nd Iceland, 3^rd Luxembourg, 4^th Switzerland and 5^th Denmark. Only Switzerland can boast to be home of one of Europe’s top 14 football leagues. But, the Swedish and Icelandic national teams make it into FIFA’s top 20 national sides. On the other end of the scale, Egypt who are ranked 70^th for developing countries from the World Economic Forum have just qualified for the World Cup with the help of potential Premier League player of the year Mo Salah. But just like Ronaldo for Portugal and Lewandowski for Poland, Salah can be seen as a potential outlier. 

 

 

 

Conclusions

 

If your country of a small population, accept that your club league will never be able to compete with the likes of the Premier League and La Liga. Focus on developing players early on and encourage moves to Europe’s top 5 leagues. It will help your national team.

 

There is a correlation in Europe between a large population, a successful national team and club league but it can’t be seen as a guarantee of success. Small countries such as Belgium prove success is possible. Countries outside of Europe with huge populations such as the USA, China and India fail to compete at the highest level of football.

 

Countries of Europe’s top 5 leagues have a lot of power determining the success of their national teams. The more foreigners in these leagues the weaker the national team will become. Outside of the top five leagues, the opposite is often true. . Players from these countries should join Europe’s top 5 leagues to reach their potential and improve their national sides.

 

If Europe’s top 5 leagues continue to buy the best foreign talent, the gap between those top 5 leagues and the rest will likely get wider but it should make international football more competitive.

 

Outliers for example a few special players, can have a major impact on trends. Cristiano Ronaldo, Robert Lewandowski, Mo Salah and the Brazilian cohort at Shakhtar Donetsk the stand out examples.

 

The standard of living in a country does have some causation of the standard of football in a country but it is not a guarantee of success or an automatic death sentence in the hope of success.

 

 

Entire Results

 

Table 2;

Diarmuid Gillingham

Twitter- @ThisIsDiarmuid