Homebuilders And The Atlanta Braves by Ben Strubel
In August, we decided to sell Anheuser-Busch InBev (BUD). AB InBev is a great company with a great business, but in October 2015 the company offered to buy SABMiller for what ended up being 44GBP per share. The deal, when finished, will create a behemoth brewer that controls over one-third of global beer sales and about one-half of global beer profits! Unfortunately, AB InBev, in our opinion (and the opinion of many others), paid much too high a price for SABMiller.
It’s virtually impossible to make the numbers work for the deal work. AB InBev would need to enact heroic cost cuts at the newly combined company and squeeze every ounce of operational efficiency out of the new entity to break even on the deal, let alone turn a profit. In fact, studies have shown that around 70% of mergers and acquisitions like this one fail to achieve their stated targets. Yes, control of AB InBev rests with 3G Capital, a well-respected investment outfit known for their superb cost cutting skills, but they are fighting an uphill battle. We just can’t see any realistic scenario that makes the deal look good.
After getting rid of AB InBev, we bought homebuilder D.R. Horton (DHI) and the Atlanta Braves! Well, just the tracking stock for Liberty Braves Group (BATRA), the company that owns the Atlanta Braves and the real estate for the team’s new stadium.
D.R. Horton is the nation’s second largest home builder and has very diversified geographical footprint, building homes all across the country. The company builds some of the most affordable homes of all the publicly traded homebuilders, with average selling prices of around $295,000. That is in line with the median new home sale price of $294,000 for July 2016 for the country as a whole. Right now, homeownership in the US has fallen to historic lows, housing inventory is at multi-year lows, mortgages are affordable, and the job market is improving. Over the next one to two years, all the people who suffered a foreclosure during the Great Recession are about to have that derogatory item removed from their credit reports. We believe this flood of new potential buyers along with tight inventory and a steadily improving economy will lead to significant growth in the residential new home construction market.
What if the Fed raises rates and mortgage rates rise? Well, the Fed sets the overnight interest rate, not any of the longer term interest rates (although it could if it wanted). While the Fed Funds rate does influence other interest rates and there are high correlations over the long term between the Fed Funds rate and longer term rates, it isn’t an ironclad rule that rising short-term rates mean rising long-term rates (and thus higher mortgage rates). We saw that play out with the small increase in interest rates last December. The Fed raised the overnight Fed Funds rate, but longer term interest rates (10-year Treasury, mortgage rates, etc.) are lower now than before the Fed raised rates! For mortgage rates, supply and demand for mortgages plays a role in setting rates. With demand for mortgages low, banks are unlikely to raise their mortgage rates even if the Fed raises rates.
The Atlanta Braves through the Liberty Braves Group (BATRA) tracking stock is our other investment. In the US, the major league sports teams are great assets. They are government-protected monopolies with each league able to limit the number of teams that can participate. Because of their monopoly status, the value of sports teams has grown at an average pace of 12% to 15% per year, which is well above the average growth rate of the stock market. We were able to buy stock in the Braves at a value well below what Forbes says the team is worth. It’s worth noting that sports teams have historically been sold at well above their Forbes’ valuation.
Here’s something to think about when it comes to the value of MLB and NBA teams. We don’t know how likely this might be and it didn’t factor into our valuation of the teams, but it’s something interesting to think about. Right now, the MLB and NBA are #2 and #3, respectively, in popularity. We also own the New York Knicks via Madison Square Garden Co. (MSG) and MSG Networks (MSGN). The NFL is far and away the most popular sport in the nation. However, the NFL has a problem. It’s a violent sport. Players can suffer horrendous health consequences from it. Those consequences, especially for players who had multiple concussions, are just starting to be common knowledge. News stories regularly profile ex-NFL players, and high profile documentaries and movies have been produced about the issue of concussions as well. Even some young under-30 stars like Detroit Lions receiver Calvin Johnson and the 49er’s Chris Borland have retired from the league due to concussion issues. The league has also responded by tweaking the rules here and there, but cannot change the fundamental nature of a sport that is built around 250lb+ people colliding with each other for an hour.
Will health concerns continue to force rule changes until the sport no longer looks like what it does now? Would that new incarnation of the NFL be just as popular? Will all of the best college athletes start choosing baseball or basketball over football? Will the MLB and the NBA be the place to go see the best athletes? I don’t know. I do know I’d much rather own teams in sports that don’t carry the serious health risks for players that the NFL does.
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