The average National Basketball Association franchise is now worth $1.36 billion, a 350 percent increase over the last five years. We took the time to perform an investment analysis on two teams valued below average for the NBA, the Milwaukee Bucks and the Orlando Magic, to look for any beneficial investment opportunities. We considered the asking price for the team, based off of recent valuations, anticipated revenues and expenses, thought of as cash inflows and outflows, as well as an investment horizon of five years.
This analysis was performed using discounted cash flow analysis. We expect that revenues are likely to continue to rise due to inflation and the possibility of increased ticket prices, but are unsure of the actual ability to control costs. However, we also do expect capital appreciation, given what we have seen in recent years with NBA teams, especially with the NBA’s $24 billion media deal with ESPN and TNT that kicked off this past season, a new collective bargaining agreement ensuring seven years of labor peace and massive international opportunities.
First, we gathered as much data as possible about the operating budget for the teams for the current fiscal year. We gathered NBA valuations from Forbes, current NBA salaries, and projected wins for the 2017-2018 season from ESPN. Then we constructed pro forma balance sheets and pro forma income statements for each team. These results are presented in the following four tables:
When looking at all of these items, we noticed that their additional expenses, when salaries have been removed, were actually quite low. When compared to the rest of the NBA, both the Magic and Bucks had the lowest additional operating expenses of any team. We think this shows that they already run a lean operation, and expected costs have a higher chance to remain relatively constant over the next five years. Additionally, the Magic had one of the lowest Expense/Revenue proportions of any team.
Using all of this information, in combination with identifying the cash inflows and outflows, we estimated those values for the next five years. Consequently, we were then able to estimate the market value for these teams five years into the future. All estimates are expressed in today's dollars with an assumed 5 percent rate of inflation. We looked at scenarios where in five years, the sale price could have increased by either 500 million dollars or even bridged upwards by 1 billion dollars. Below is our Market Value Analysis:
The results of this analysis show that the Orlando Magic would be the safer bet to make the most expected amount of return on this investment. All signs point to an increase in valuation. Despite posting their fourth-consecutive losing season, the Magic had the second-sharpest local television ratings increase in the NBA during 2015-16. Attendance at the Amway Center also rose, averaging 17,543, which is up 4.5%. Fans have gravitated to the team's young core with the top six scorers 25 and under. The youth movement helped the team win 10 more games than the previous year, albeit still with a final losing record. However, as the team continues to improve and the Heat continue to fight to even make the playoffs, we expect both of the figures to increase.
However, we believe the Milwaukee Bucks show the most potential. Their new arena will only add to the valuation of the team, as well as draw in new fans and increase the number of expected ticket holders. The Milwaukee Bucks’ new arena will be the centerpiece of an almost 30-acre downtown development that also will include an apartment complex, practice facility, retail and public plaza just north of the Bucks’ current home, the BMO Harris Bradley Center. Additionally, ESPN’s projections has them as a top 4 team in the Eastern Conference next year. Their valuation has increased 16% in the last year, and we expect that trend to continue.
In either case, the expected return on investment far outweighs that of the stock market. If we put one billion dollars into the S&P 500, we are expected to have around a 10% return. However, there is a chance that we would instead break even, or even lose 10% of our initial investment. Using a 60-20-20 model, the expected value for a return from an investment in the stock market is only 40 million dollars, far less than the purchase of either basketball franchise.
As we are quite risk averse in our investments, our final recommendation is to purchase the Orlando Magic. A profitable return is likely, and as they continue to grow their market and young players over the next few years, their valuation should increase as well.
What do you think of our analysis? Which NBA team would you purchase as an investment? Let us know in the comments below! As always, all data, analysis, and images can be found on our Github.
The SaberSmart Team