I’m writing this on Saturday morning, just before heading out to see a Mets spring training game in Florida.
Yesterday’s New York Times has a front-page article (I’ve tried to link the article but I’m sending this from a Starbucks and I’m finding the NYT search function is awful! Sorry. 3/28: here it is.) detailing the Mets’ current financial troubles. It states that the Mets lost $10 million in 2009 and $50 million in 2010. The paper expects the club to lose another $50 million in 2011. My guess is that this last figure will prove much too low.
Another aspect of the Mets’ bottom line is that the losses come after including the yearly payment to the club of $60 million for broadcast rights to games. That payment comes from the cable network SNY, which is also owned by the Wilpon family. Whether the figure represents a subsidy to the Mets or a shifting of value away from the club isn’t clear to me. The only figure I have for comparison is the one from the $1 billion lawsuit filed against the Mets by the Madoff trustee. The court papers say the Mets bought back broadcast rights from Cablevision in 2003 for under $10 million a year.
Where does the NYT‘s information come from? The article doesn’t say, but I presume the source is one or more of the approximately half-dozen parties now poring over the Mets’ financials in preparation for possible bids to buy a stake in the baseball team.
According to the article, current ownership’s projections call for the team to be back in the black by a healthy amount by 2015. To me, that sharp reversal of current form would be a prodigious feat of management skill, even if the Madoff litigation weren’t hanging over the club.
As a life-long Mets fan, I feel a horrible temptation to begin a litany of the shortcomings I perceive in the way the Mets have been managed over the past decade. But that’s not my point, and the ballgame is calling.
My post of a year ago
About a year ago, I wrote a post about the Mets, saying I believed they were in far deeper financial difficulty than was commonly thought. I had assembled some figures, like the Mets’ payroll, ticket sales and concession revenue. I knew something about the interest and principal payments due on the bonds issued to finance CitiField construction. But getting hold of the bond offering documents, which aren’t easy to find, proved beyond me. And, of course, I didn’t have anything like the data that prospective bidders are being furnished with. Also, I’m basically a lazy person when no money is on the line.
Why was I convinced that the Mets had financial troubles? The club’s behavior had changed—in a way that was totally at odds with their previous behavior but was entirely consistent with the hypothesis that the club faced a serious revenue shortfall.
IThe Mets had made a trademark of spending lavishly on free-agent baseball talent. They didn’t always spend wisely, as $24 million for Luis Castillo or $39 million for Oliver Perez will attest to, but they always spent a lot. Two off-seasons ago, however, the club altered that behavior drastically. Yes, the Mets did sign Jason Bay. But despite the fact they desperately needed pitching, they ignored all the available pitchers. That may have been the prudent way to go, but my point is that the Wilpons had never acted that way before.
Time passed. The club’s pitching woes worsened. Yet the Mets were reluctant to pursue pitchers whose price tags would be less than $1 million in yearly salary. These may not have been the best arms in baseball, but they were better than what the Mets had on the roster. There were also leaks of the Wilpons’ dissatisfaction with the performance then general manager Omar Minaya, whom the Mets were supposedly reluctant to let go because he had a $3 million buyout clause in his contract (if these sories are true, and the Wilpons’ evaluation of Mr. Minaya were accurate, then the decision to keep him on the payroll for another year was lunatic, but that’s another story).
Significance for stock market investors
If you watch companies carefully enough, you’ll discover that they have personalities, just like individual people do. There are some actions you come to expect of a management team, and some that you’ll come to think are completely out of character.
I think this kind of qualitative observation is extremely important to do, especially for growth companies. While a company acts within what you understand its personality to be, you get little data other than more confidence that you have typed the firm correctly.
But when a company acts out of character, you almost always have very significant information. And you have it—positive or negative—far in advance of when the reasons for the change become apparent in the company’s financial results.
If you can put yourself in the place of the company’s CEO and ask yourself, “Why would I be doing this?”, you will in all likelihood get insights into corporate strategy—and therefore into potential earnings surprises—far ahead of Wall Street analysts who are focusing mostly on what results will be over the coming three months. This will give you time to either add to positions or exit gracefully before reported earnings make the new state of affairs evident to all.