Ballmer paid a P/E ratio of 133 for his #Clippers purchase based on last year’s estimate of operating income: http://t.co/TpX8pxjZib
— Charles Sizemore (@CharlesSizemore) May 30, 2014
If Steve Ballmer were still running Microsoft (MSFT) I would dump the stock, questioning his judgment and sanity.
Ballmer just agreed to pay a record $2 billion to the Sterling family for the LA Clippers franchise–a franchise that Forbes estimated to be worth $575 million just this past January.
Let’s take a look at the numbers here. The Clippers brought in about $128 million in revenues last season and generated $15 million in operating income. Calculating a “price/earnings” ratio on the purchase would give you a bubbly 133.
Remember, the Clippers are LA’s “other team.” And the Lakers–LA’s premier basketball team and one of the most storied franchises of any sport anywhere in the world–were estimated by Forbes to be worth “only” $1.4 billion. The New York Knicks were estimated to be worth about $50 million more than the Lakers.
I’ve been watching the sports bubble for a while now. As far back as 2010, I questioned whether the boom in sports stadium building were coming to an end. As I noted then, between 1992 and 2010, well over two thirds of ALL major North American sports venues were replaced: 67% of baseball teams, 69% of football teams, 77% of basketball teams, and a shocking 83.3% of hockey teams got new homes or had their old ones substantially renovated to the point of being virtually new. And the prices paid reached the levels of the absurd.
Someone has to pay for all of this, and much of it has been “financed” by lucrative TV deals. But this model seems to be reaching its limits. As I wrote recently, the cost of monthly cable bills have been increasing at a rate of about 6% annually. The average cable bill was $86 in 2011. By 2015, it is forecast to be $123 per month. Given that income growth has been stagnant for years, that’s not a sustainable trend. Ironically, Disney’s ESPN is the number-one culprit; the ESPN channels are alone responsible for about $5.50 per month.
The problem with calling the top of a bubble is that, because they are irrational to begin with, they can always get more irrational. But I’m taking the view that Ballmer’s $2 billion purchase of the Clippers will go down in history as one of the dumbest financial moves in history.
Is there a trade to be made here? If you think the bubble has longer to inflate, consider shares of Madison Square Garden (MSG), the owner of the New York Knicks and the New York Rangers hockey team. If the Clippers are “worth” $2 billion, then the Knicks are “worth” double or triple that amount. And MSG, trading at a P/E of 31, looks “cheap” relative to that of the Clippers.
Just be smart enough to know that you’re trading a bubble.
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