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Man United: Coach Gone, Focus on Valuation

Suzanne McGee

Over the last week or so, in the run-up to the Berkshire Hathaway (BRK-B) annual meeting, there has been – once again – a lot of buzz surrounding the succession plan that Warren Buffett has put in place at his holding company. Meanwhile, an equally important change was brewing at Manchester United (MANU), a premier English football club that is traded not only in the United Kingdom but also listed on the New York Exchange. Sir Alex Ferguson, the legendary manager of the club, who has guided it to a record 20 English football league titles over his quarter-century-plus at the helm, announced his retirement Wednesday, causing the company’s stock to retreat from its recent highs, as seen in a stock chart.

MANU Chart

Ferguson is seen as the key to the success of Manchester United both on the football pitch and as a public company, to the extent that when the football team went public on the NYSE last year, the company’s regulatory disclosures noted among the potential investment risks the prospect of a change in its leadership. It was Ferguson who oversaw the revival in the fortunes of the team itself, without which Manchester United couldn’t have become the global brand that it is today, with the team’s red shirts recognizable as far afield as Laos.

That success has enabled the company’s owners (shareholders today include George Soros) to profit not only from the sale of tickets and broadcast rights, but all kinds of branded merchandise. Deal after deal – insurance giant Aon (AON) won the right to put its name on the team’s jerseys – sent money flowing into Manchester United’s coffers and made an IPO possible. Today, it ranks as the most valuable sports franchise in the world, with a market cap of $3 billion, up from $2.3 billion at the time of the IPO. That dwarfs the Dallas Cowboys, which Forbes early this year calculated was the second most-valuable sports team in the world and was worth about $2.1 billion.

MANU EBITDA Annual Chart

The problem – if it is one – is that the company’s earnings tend to follow its fortunes on the pitch. Any successor to Ferguson at the helm of Manchester United would have been tricky, of course, just as anyone following in the giant footsteps of the likes of Apple’s (AAPL) Steve Jobs or Warren Buffett would have found it tough going.

But while David Moyes, coach of the Liverpool-based Everton team, has been recommended by Ferguson as his successor and will join the team in July, he has never won a major trophy at his current club. It’s entirely possible that this may change once he is running what is widely acknowledged to be one of the most successful football teams not only in England but wherever soccer is played. For the time being, however, until Moyes has the chance to prove what he is made of in the coming year, investors will be adding execution risk to price risk.

MANU Forward PE Ratio Chart

That price risk isn’t insignificant. Manchester United’s shares have climbed more than 30% since its IPO a year ago and that now trades at an astonishing PE ratio of 77 and at nearly 50 times prospective earnings. Even without Ferguson’s departure – and the risk associated with that may be more a matter of perception than reality – this isn’t a stock to look on as a bargain in response to the relatively small selloff in the wake of this week’s news. That is especially true since the English football season wraps up this month – with Manchester United on top again – leaving investors with little immediate insight into whether a Moyes-led team will thrive.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.

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