from Amazon
Thursday, August 25, 2011
Picasso Theory
Phil has another post on this. We talked about some of this way back, for those new around here (see the comments section).
Phil also asks:
You have to come up with some way of estimating “psychic values” to figure out where we actually are.
Well, this is actually pretty easy. Let’s do an easy one, where you have a stable company, with a stable business, and there’s no more growth curve. I dunno… say, Johnson and Johnson, or McDonald’s, or Coca Cola. Some company like that. The valuation of their company, of any company, is the discounted value of all future earnings, plus whatever their net assets are. Their future earnings are going to be stable (at least expected anyway). The discount rate should be stable, but over these last few years, it’s not. Anyway, apply some discount rate like 5%, and we’re done.
You apply the same thing in MLB, NHL, NFL, NBA. The profit amount for each sport each year has probably been fairly stable. The number of teams that breakeven or not remains stable, the number of teams sold remains stable. We don’t expect this to be like eBay or Amazon circa 2000 or Microsoft circa 1990, where growth rate may explode, and infrastructure costs to startup may be high. We should be able to predict the profit level of each sport over the next 10 years. We don’t expect a huge revenue stream (though perhaps I’m talking too soon because of MLBAM). We don’t expect a huge revenue drop.
Therefore, since we have a fairly stable business enterprise, we can discount all future earnings, add in the current net assets, and we’ll know how much a league is intrinsically worth. (This presumes a proper “fair market” accounting of profits from cable TV.) We look at how much teams are actually selling for, and the difference is: Picasso.
So, let’s try a practical example. Let’s say that MLB earns 200MM$ in 2011, and then it increases its profits by 3% every year. And let’s say we apply a 5% discount rate. The sum of all its future earnings is going to be 9.3 billion$. Add in its current net assets, and let’s say MLB is worth 10 billion$. The average team is selling for 500MM$, and therefore, the league can be bought for 15 billion$. That makes the Picasso value at 5 billion$.
Of course, I’m just pulling numbers out of my a$$. You need to know the amount of profit, the future growth, the discount rate, and its current net assets. Who knows, maybe the Picasso value is 0. Or it’s 15 billion$ if the league breaks even every year.
Some Straight Arrow reader out there can give us a better illustration than I’ve provided.
Recent comments
Older comments
Page 1 of 344 pages 1 2 3 > Last »Complete Archive – By Category
Complete Archive – By Date