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Has Manchester United Turned a Corner?

Shares of global sports giant Manchester United PLC (NYSE:MANU) are up more than 30% since Oct. 9, 2020 as of the writing of this article. A significant slice of that gain came shortly after the sports team company announced its results for its first quarter of fiscal 2020, coupled with a relatively better run of results on the football pitch.

However, Shares of Manchester United still remain way off the all-time high of $26.20 achieved in August 2018. This is primarily because of the uncertain future regarding the company's leadership as fans continue to question the current head coach Ole Gunnar Solksjaer's managerial capabilities.


With the latest string of match results putting the manager's position under threat, the odds are beginning to swing in favor of a new appointment soon. This would be the fourth permanent appointment since the legendary manager Sir Alex Ferguson retired in 2013.

Analysts have suggested that if Solksjaer were to lose his position within a couple of years, then that would begin to reflect badly on chief executive vice-chairman Edward Woodward and the board, who are responsible for appointments to the position.

While Woodward has a decorated CV for his role when he spearheaded the company's commercial business, many of the club's followers have voiced their concerns about his ability and understanding of the football side of the business. The club has deliberated on appointing a director of football in an attempt to become more efficient in buying new players and renewing player contracts, but this is yet to happen.

There are also concerns that Manchester United is beginning to lose its ability to attract top players, a crucial asset for future success both on the pitch and commercially. This could significantly curtail growth in the foreseeable future.

The effects of missing out on Champions League football this year

If Manchester United fails to qualify for the Champions League this year, this could affect its top line for fiscal 2020/2021. This is because despite missing out on revenue received from participating in Europe's elite competition, the company's shirt sponsorship revenue could receive a major hit as well. According to reports, Manchester United's contract with Adidas AG (XTER:ADS) entitles the global sporting goods giant to a 30% discount on the annual sponsorship deal of ?75 million pounds (approximately $97.5 million USD) if the club misses out on Champions League football for two consecutive years.

Having missed out already in 2019/2020, Manchester United cannot afford a similar occurrence for the 2020/2021 period. This could result in a more than ?22 million revenue squeeze. Analysts have also estimated that missing out on the Champions League this year could cost the company at least an additional ?30 million, but the impact on the bottom line could be offset by wage reductions of 25%.

Manchester United are expecting the 2020 revenue to drop by ?67 million to about ?560 million, down from about $796 million in the full fiscal 2019. The company's debt also soared by about 55.5% to ?384.5 milllion, up from ?247.2 million, which sparked more fan protests. Fans remain critical of the club's ownership following an adverse turn of fortunes in recent years.

Can success off the pitch drive stock performance?

Despite all this doom and gloom, shares of the company have rallied more than 30%, and this shows that investors still find the stock attractive. This could be due to Manchester United's success in the commercial side of the business, which continues to grow with more sponsors joining the frame.

The company's top sponsors include the shirt sponsor Adidas, General Motors (NYSE:GM) auto manufacturer Chevrolet, watchmaker Tag Hauer, global insurer Aon (NYSE:AON), Japanese video game maker Konami (TSE:9766), international package delivery company DHL (FRA:DHL), and home appliances manufacturer Kohler and others. This list continues to get longer despite Manchester United's current woes, and this indicates that its brand is still as powerful as ever.

This could be what investors are betting on to drive growth in the short-term before the company turns things around on the pitch. How long that takes is the big question though, with football analysis platforms already appearing to rule out Manchester United's chances of returning to Champions League football later this year.

Manchester United can make it back to the list of Europe's footballing elite by winning the EUFA Europa League or finishing in the top four of the English Premier League. With a top-four finish more or less ruled out this season due to high competition, it looks like all hopes rest on the Europa League for now.

Therefore, it remains to be seen whether success outside the pitch can be the key to rediscovering consistency on it, which in turn will drive future growth. The club's history of success is expected to continue to attract top talent.

However, many are now beginning to question whether that will be enough to sanitize present shortcomings that have seen some of the key assets at the club led by midfielder Paul Pogba begin to seek a way out.

Conclusion

In summary, Manchester United's performance on the pitch has deteriorated in recent years. This has affected the stock's performance, but recently, shares appear to have turned a corner after rallying more than 30% in 3 months.

Nonetheless, the company's stock is now valued at a price-earnings ratio of about 188, and this figure could rise even higher depending on how the expected decline in top line and an increase in debt affect the bottom line.

Disclosure: No positions.

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This article first appeared on GuruFocus.