Fourth quarter and full year results out from Manchester United (MANU) on 18th September were marginally below forecast - to miss estimates just a few weeks after your IPO is pretty poor form. Talking of pretty poor form, Manchester United are currently 2nd in the English Premier League but have looked unconvincing against some weak sides so far. At $12.58 the shares are already well down on the $14 IPO price and also on the $13.35 price at which I explained in detail why this was a sell on 27th August. But there is worse to come: my target remains $7.
For the year to June 30th 2012 revenues fell by 3.3% to £320.3 million ($520.04 million) primarily because of United's failure to make the playoff stages of the European Champions League. EBITDA fell from £109.7 million ($177.7 million) to £91.6 million ($148.4 million) but net income increased from £13 million ($21.1 million) to £23.3 million ($37.7 million). Earnings per share came in at 15p (24.3 cents) up from 8p (13 cents). You will remember that this is meant to be a "growth stock" but the fact is that earnings do not grow consistently but can bounce up or down depending on the on-field success and that cannot be guaranteed.
Profits were boosted by a profit of £9.7 million ($15.7 million) on trading players (up from £4.5 million - $7.3 million). This year they have already offloaded one player bought for £30 million or $48.6 million (Berbatov) for £4 million ($6.5 million). So do not bank on a similar gain next time.
The balance sheet is, as ever, a bit of a worry. Net debt increased from £308 million ($499 million) to £366.3 million ($593 million) at the year end leaving net interest costs at an alarmingly high £49.5 million ($80.2 million). The cash flow generated from operations during the year was £80.3 million ($130.1 million ) - a decline of 35.8% - but that was more than swallowed up by capex of £22.7 million ($36.8 million), the aforementioned interest costs and by the net costs of buying and selling players (£49.6 million, or $80.4 million). If Manchester United is to win anything this year (it failed to win a single trophy last season) it has to spend on new players and indeed has already done so.
The bull case (explained here on Seeking Alpha earlier today) is predicated on guidance from United that it will generate revenues of £350-360 million ($567 million - $583 million) this year and that this will equate to EBITDA of £107-110 million ($173 million - $178 million) but this assumes that United makes it through to the Champions League playoffs and the quarter finals of both domestic cup competitions - this equates to earnings of $0.19 per share. I am far from convinced that it has a deep enough squad to fight for all three cups plus the English Premier League. If injuries, suspensions and the need to rest key players force it to field weaker sides in some UK cup matches, United may well (as has happened in previous years when its squad was stronger) suffer an unexpected reverse.
The following year a new shirt sponsorship deal with GM will help the picture. But United needs the cash. On the basis of its own (optimistic) forecasts for EBITDA this year it is hard to see how - even if it does not buy more players in the next transfer window, as it should - it will be able to repay any of its debt.
At $12.58 the company is still valued at $2.06 billion. It has debt of c$600 million. You are being asked to pay 66 times forecast earnings (on a best case scenario of cup success) for a company which is overborrowed, has erratic and unpredictable earnings, questionable corporate governance and - after a season of failure - an, arguably, diminishing brand value. Even at my target price of $7 the multiple is 37.
Tonight United starts its European campaign in Turkey. It needs to win if it is to convince doubters that it might just hit its on field targets (and thus financial targets) for this year. If the Red Devils lose in Turkey, shareholders will get roasted tomorrow. Even a victory it still looks the current valuation as indefensible.