Investors in these uncertain economic times are looking for stability and predictability when they decide to invest extra dollars. Consider this investing proposition: You have a chance to invest in businesses that have been around since the 1920s and are growing in popularity. These companies have an intensely loyal consumer base; in some areas of the country, there is a waiting list of years to purchase products. Most rational investors would argue this is a compelling value proposition.

The industry that I am referring to is professional sports, particularly its franchises and ancillary businesses. This seems like a slam dunk of an investment theme; however, to quote ESPN football analyst Lee Corso: "Not so fast, my friend!" It is true that professional sports leagues, with its derivative businesses such as athletic apparel and media conglomerates, have become a multi-billion dollar industries, but these businesses are not risk-free and in many ways can be more risky than traditional corporations. Today, we will look at the pros and cons of investing in big-time sports.
See: Value Investing

Pros
In economics, demand or "final demand" is defined as the ability and the desire to purchase goods and services. Professional and college sports programs strike a strong emotional chord with their audiences. There aren't a lot of companies that can claim a higher brand loyalty to their businesses, than big-time athletics. Typically, this means their dollars will follow their hearts. The National Football League (NFL) tends to market toward a more affluent or "able" customer base; an affluent family of four can easily spend over $1,000 while attending one sporting event. If this family attends 10 events per year, well, you get the picture.

Likewise, people spend serious money renovating entire rooms of their homes to show support for their alma mater. Professional and collegiate sports have also successfully adapted to the ever-changing technological landscape that is part of our daily lives.Viewing of live sporting events on mobile devices is growing rapidly, as well as on satellite radio and pay-per-view showings. All of these distribution channels are revenue drivers for these businesses.

In fact, the NFL started its own television network where it can realize more of the advertising revenue, instead of sharing with traditional networks (FOX, CBS, NBC and EPSN, to name a few). The networks charge premium prices that their loyal customers and sponsors are willing and able to pay. How many people thought there would ever be a golf or tennis channel around the clock?

Another tremendous advantage these major sports leagues have is lack of competition. It's simply a tough nut to crack or as economists would claim: "There are too many barriers to entry" to compete with Major League Baseball, European soccer or the National Football League. There have been some attempts to challenge these leagues, but all have failed. Some sports leagues are also protected legally by anti-competition legislation.

The NFL in the U.S. has a special antitrust exemption. How many businesses can make a similar claim? One would suspect that is a very short list. Finally, these businesses enjoy repeat business; most people don't just own one t-shirt of their favorite team, they own several. Many families pass down season tickets to their children, instilling further brand loyalties for future generations.

Cons
Sports teams and leagues are not immune from economic shocks. Demand for sports entertainment depends on the overall economic climate. The recent, prolonged weakness in the economy has hurt attendance at many sporting events. Some NFL towns struggle with mandatory blackouts due to low season ticket sales, as most average Americans view sports as good entertainment that can be enjoyed when there is extra income to spend.

From an economist's perspective, demand for attending sporting events is elastic. In other words, a change in someone's income (downward) or a change in the products costs (ticket prices upward), will have a material impact on final demand (ticket, merchandise and pay-per-view sales). These are the hard economic facts about why sports investments can be risky, but perhaps less apparent are the exogenous or human factors that investors should be attuned to that present at least equivalent business risk. (For related reading, see Why We Splurge When Times Are Good.)

It seems that every day we hear about a sports scandal more sensational or unbelievable than the day before. Make no mistake, these scandals hurt business and at times present irreparable damage to reputations. Tiger Woods' extramarital affairs caused NBC's golf ratings to take a significant hit, that the network has yet to fully recover from. Recent allegations of sexual abuse at Penn State University not only hurt its reputation, but apparel sales dropped significantly as a result. Incidents such as the one where NBA players jumped into the crowd and brawled with fans (or "customers"), harms the reputation of the NBA brand.

Furthermore, greed is everywhere in these businesses: Stars in these leagues make much more annually than the average consumer. The point here is that these businesses present risks to investors that are not traditionally part of business. If employees of a major corporation went on strike, the company's stocks would most likely get hammered in the short-term. If the CEO of a blue-chip company decided he wasn't going to report to work for months, or hold out for more money, these companies would face serious repercussions from investors. (For more information, read Stocks Basics: What Causes Stock Prices To Change?)

The Bottom Line
Investing in companies that benefit from the multi-billion dollar sports business can be an appealing and profitable proposition. High consumer demand, pricing power and lack of competition, are critical success and survival advantages that big-time sports leagues and teams command. It is also important to realize that these businesses have unique risks. So, the next time you are at a sporting event, look at the ancillary businesses that support your favorite team and see if they make sense in your financial playbook.

Also realize that sports entertainment is generally considered a "luxury" and subject to the economics laws of elasticity. The same human or emotional factors that attract us to spend our dollars on their product, can quickly sour due to unforeseen events.

Related Articles
  1. Stock Analysis

    5 Reasons Thoratec Corp. Keeps Impressing Investors

    Learn about Thoratec Corporation and its position in its industry. Understand five key factors why the company has impressed investors.
  2. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  4. Technical Indicators

    Key Financial Ratios to Analyze the Mining Industry

    Discover some the most important financial ratios used by investors and analysts to evaluate companies in the metals and mining industry.
  5. Technical Indicators

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  6. Technical Indicators

    Key Financial Ratios to Analyze Airline Companies

    Examine some of the most important financial ratios and performance metrics investors use to evaluate companies in the airline industry.
  7. Stock Analysis

    The 5 Biggest Canadian Oil Companies

    Obtain information about some of the largest and most successful major integrated oil corporations that are headquartered in Canada.
  8. Technical Indicators

    Key Financial Ratios to Analyze Tech Companies

    Understand the technology industry and the companies that operate in it. Learn about the key financial ratios used to analyze tech companies.
  9. Stock Analysis

    3 Reasons to Continue to Own Monster Beverage

    Learn more about the Monster Beverage Corporation and some of the primary reasons why investors and market analysts like the stock.
  10. Technical Indicators

    Key Financial Ratios to Analyze the Hospitality Industry

    Understand the hospitality industry and the types of companies that operate within it. Learn about key financial ratios used to analyze the industry.
RELATED TERMS
  1. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  3. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  4. Black Money

    Money earned through any illegal activity controlled by country ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  3. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  4. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  5. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>
  6. How can a company reduce the unsystematic risk of its own security issues?

    Companies can reduce the unsystematic risk of their own security issues simply by doing the most effective job possible of ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!