Manchester United Still A Buy Despite Sir Alex Ferguson's Retirement

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 |  About: Manchester United Ltd. (MANU)
by: Chris Katje

Manchester United (NYSE:MANU) shareholders and fans learned recently of the sad news concerning the retirement of Sir Alex Ferguson as the team's manager. Ferguson, who had guided the Red Devils for the last 26 years, leaves investors with several possible long term buying opportunities.

Newly elected head coach David Moyes spent the last 12 seasons as the manager of Everton. Moyes has a great deal of management experience in the English Premier League, where Manchester United plays. Moyes will be the second longest serving EPL coach, with the retirement of Ferguson. As manager of Everton, Moyes posted a record of 217 wins, 139 draws, and 160 losses.

With an underfunded team, Moyes won coach of the year on three occasions (2003, 2005, 2009). Moyes also took Everton to the Champions League in 2005 and the FA Cup final game in 2009. All of these accomplishments, despite a small operating budget, have got to leave Manchester United shareholders and fans feeling good. Obviously, Ferguson is a legend and will not be easily replaced, but I am excited to see what Moyes can do with a larger budget and more talented players.

Several negatives could come soon that could send shares down and create long term buying opportunities. Ferguson's retirement, which I expected to hammer the stock, did not have a great impact on shares.

Hedge fund manager George Soros has a large stake in Manchester United. Back in August, I wrote about his increased 7.85% ownership stake in Class A shares (about 2% overall ownership). The activist may decide to take profits, rather than leave his fate in the hands of a new manager. While I don't think this is the case, investors should be ready to pounce on shares if they decline from news like this.

Another negative that could have an impact on shares would be the rumored transfer of Wayne Rooney. The 27 year old striker, who has been with Manchester United since 2004, reportedly wants to leave the team. In 278 appearances with the Red Devils, Rooney has 141 goals. The dynamic scorer has helped the team win five Premier League titles and a Champions League title during his time with the club.

Rooney was traded to Manchester United in 2004 for 25.6 million pounds. The connection here is it was Everton and Moyes who traded Rooney to Manchester United. The new head coach and player also have a very tense relationship. In an autobiography written by Rooney, he listed details of conversations with Moyes before his transfer. Moyes sued Rooney for damages and eventually settled out of court.

The loss of Rooney will be a big one, but is a necessary step to start Moyes out on the right foot. Last season, Manchester United brought in Robin Van Persie, a talented striker. In the 2012-2013 EPL season, Van Persie led the league with 25 goals in 37 contests. The team has lost talented players like David Beckham and Christiano Ronaldo before, and is always able to bring in new talent and excel. Expect shares to fall when Rooney is traded, but don't expect the departure to have the impact everyone thinks.

The important thing for fans and investors to remember is Moyes is taking over a team that just won the Premier League in convincing fashion. With 28 wins, four draws, and five losses, Manchester United racked up 88 points and finished 10 points ahead of runner up Manchester City. When Ferguson took over United, the team had just finished in 21st place, or second from the bottom. Sir Alex was able to take the team to 11th place in his first year, but before he came along the team was not in the glory it is today.

More importantly, the first place finish in the Premier League guarantees Manchester United a spot in next year's Championship League, which has a huge impact on broadcasting revenue. The team is also strengthening its licensing revenue and increasing its fan base thanks to a successful season. These positives set the stock up nicely, whether Rooney is with the team, or there is a new manager.

One article I wrote on Manchester United looked at the consumer goods and licensing side of the team. Several new deals will provide nice boosts to revenue.

  • NBC Sports (NASDAQ:CMCSA) new EPL broadcasting deal ($250 million for 3 years) will provide better broadcasting revenue, could provide better viewership in United States and a greater fan base
  • The Chevrolet shirt sponsorship deal begins in 2014. Manchester United will get $70 million the first year and a total of $559 over seven years
  • In April, it signed a sponsorship deal with Aon for the team's training ground and some training gear. The eight year agreement will pay the team a rumored $230 million.
  • Summer tour includes stops in Australia, Japan, Hong Kong, and Thailand. This should provide a boost to the fan base and create opportunities for more global sponsorships.

In the most recent reported third quarter, Manchester United saw revenue increase 29.5%. This was led by strength in all three reported segments.

Revenue (in Millions British Pound)

Increase from Prior Year

Commercial Revenue

36.0

+31.9%

Broadcast Revenue

21.7

+28.4%

Matchday Revenue

34.0

+27.8%

Total Revenue

91.7

+29.5%

Net Income

3.6

1.1

Click to enlarge

Broken down even further, the commercial segment saw increases in all its breakdowns. Sponsorship revenue increased 52.2%, retail/licensing revenue increased 9.5%, and new media/mobile revenue increased 13.7%. As you can see, with or without Ferguson, the company is a bright investment as a licensing play.

Since its IPO, Manchester United has been paying off its debt. Seen as one of the biggest risks for investors, analysts criticized team owner Malcolm Glazer and his large debt levels. The company has paid off debt to lower interest payments and provide a greater balance sheet for investors. In fiscal 2012, debt lowered to 367.6 million pounds (from 423.3 million the previous year).

In the 2013 annual valuation rankings, Forbes ranked Manchester United as the second most valuable soccer team in the world. This was the first time United was not first, as Real Madrid passed the team with a valuation of $3.3 billion. United ranked second with a $3.17 billion valuation. Forbes listed annual revenue as $502 million and operating income as $144 million in its rankings. Forbes cites the Chevrolet sponsorship and a recent deal with Aon as huge revenue generators that could propel the team back to the top. The company's current enterprise value is $3.5 billion, ranking above the Forbes value.

I recommended buying shares of Manchester United prior to their IPO, which priced at $14. Shares are now up to the $18 level. It took five months for shares of the publicly traded soccer team to break their $14 opening price. Since that time, the company has enjoyed success and traded as high as $19.34. Once the dust settles over the new coach and possible Rooney departure, shares will see $20 and will be a great long term investment. The first season with Moyes could keep shares below that level, but long term investors will be rewarded.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MANU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.