The price of Manchester United (Man United) stock was $16.24 on Thursday, August 15, 2019.
What does this mean?
How is the price determined? Well, $16.24 is the price that sellers offered their shares on the trading exchange to buyers who bought those shares. In effect, the $16.24 price is market-determined and based on the interplay of demand and supply. If more investors want to buy Manchester United shares, the price rises, if more shareholders sell Man United shares, the price falls. Simple.
However, what triggers buyers and sellers to buy and sell respectively? It’s simple really. These investors have determined an intrinsic value for Manchester United shares and are trading off that value. For instance, if investors calculate that the intrinsic market value per share of Manchester United is $15, but the market price per share for Manchester United is $10.80, they will buy because they are buying at a discount to intrinsic value. If, however, they determined that the intrinsic price of Manchester United is $5, but market price is $10.80 then they will either sell or hold because the market price is at a premium to the intrinsic price per share.
The intrinsic value is the “perceived or calculated value of an asset, an investment, or a company.” Put in another way, the intrinsic value is the singular distillation of the entire value of a company, brand, profits, revenue streams reputation, everything.
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I will categorize intrinsic value as the per share value of the Enterprises Value (EV) of the company plus intangibles like goodwill. (Enterprise Value = Market Capitalization + Market Value of Debt – Cash).
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How do we measure the Enterprise Value of a football team?
The accounting firm KPMG “presents a team’s enterprise value, taken from its profitability, popularity, sporting potential, as well as the value of broadcasting rights and revenue opportunity stemming from stadium ownership.” Forbes, on the other hand, calculates a team’s value based on its “economic performance from matchday, broadcasting, and commercial sources, as well as any additional value generated by its market position or potential.” Both methodologies seek to pin a valuation based on assets and current and future revenue streams.
As at November 2019, Man United’s EV was projected at about $2.6 billion. This means the value of Old Trafford, with her 76,000 seats, players like Paul Pogba, the media and sponsorship deals, plus debt, less cash is a $2.6bn. If we add the intangibles like goodwill from a loyal fan base of 659 million, (including 325 million in Asia) we can then estimate the intrinsic value per share. Remember, this is a calculated guess based on revenues and goodwill; the answer will fluctuate from analyst to analyst.
Walking back, we can deduce that stocks move based on demand and supply, and demand is based on the perceived pricing relationship between intrinsic value per share and the market price. Hence, investors must understand how intrinsic value is calculated. The most common way to calculate Intrinsic value is the Discounted Cash Flow method (DCF), this method takes all the expected future cash flow the company will generate and “discounts” them back to the present day using a discount interest rate. Essentially, the DCF is utilizing the principle of the time value of money to determine an intrinsic value per share to be compared with the market price.
The question is thus simple, will intrinsic value per share rise or fall? By how much? What assumptions are underpinning the performance of the company?
How does Manchester United make money?
Man U makes money by winning, More wins and trophies bring in more fans, more fans bring in more revenues from gate takings, branding and media. This pushes up cash earned and increases the EV. On the flip side, if Man United stops winning, then the revenues go down, dropping EV. Losing out on the Champions League, for instance, is a potential £80m loss in UEFA payments, sponsorship deals and ticket sales.
Consider this, Man United shares were trading at $21.20 in February 2019. In that February, Manchester had been on a run of 12 games unbeaten. They had qualified for the Champions League Quarter Finals and were contesting for top 4 in the English Premier League. This translated to more expected future income, thus the analyst calculated that revenues would go up, meaning EV would go up, thus making the shares of Man U “cheap” in February in relation to the current market price; thus, they bought more shares and rewarded Man United with a Market capitalization of $3.5 billion (Capitalization is price of shares multiplied by current market price).
However, as at 14th November 2019, Man U was out of the Champions League and no longer contesting for the top four league table position in England. This clearly is a loss in revenues to the business, meaning EV will fall; thus, the analysts sold their positions on Man United because without the expected revenues as projected, the shares were overpriced, thus the shares fell to $16.24, reducing market capitalization of Man United to $2.68 billion, a $1 billion wipe-off in market capitalization.
When Man U lose games, they lose money, it’s that simple. The future price of Man U shares is basically a function of how many games they can win. Lost revenues cause a fall in the share price and market capitalization.
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The real analytical skill is to determine how a business makes money, then use that knowledge to scenario plan assumption on revenues and costs, market shares and even regulatory issues, which will affect future revenues going forward, which impact the EV to derive an intrinsic price.
Whilst we have used football as an example, this analytical process is applicable in all industries.
- How does a company make money?
- Draw up assumptions.
- Calculate Intrinsic value.
- Compare intrinsic value with market price.
- If Intrinsic value is lower than market price, don’t buy.
- If intrinsic value is higher than market price, buy.