Sport stocks. Investment risk or opportunity?

Table of Contents

Introduction
History and Performance of the Company
Company Profile
Industry Specifics

Fundamental Analysis
The Balance Sheet
The Income Statement
The Cash Flow Statement
Other Ratios

Technical Analysis
Simple Chart Pattern
Moving Average Convergence-Divergence (MACD)
Momentum

Risk Factors
Market Risk
Credit Risk
Operational Risk
Other Risk Factors

Conclusion

References

List of Figures

Figure 1. Borussia Dortmund Corporate Structure

Figure 2. Chart Borussia All Data

Figure 3. Borussia-DAX 3-Year Comparison

Figure 4. Borussia-DAX 1-Year Comparison

Figure 5. MACD

Figure 6. Momentum Analysis

List of Tables

Table 1: Evaluation Overview

Introduction

History and Performance of the Company

Professional soccer team Borussia Dortmund (hereinafter Borussia) was founded on December 12th, 1909, as “Ballspiel Verein Borussia Dortmund 1909 e.V.”. After a hurdle-some development, the team won the German championship for the first time in 1956, and managed to defend it the next year. After winning the German Cup in 1965, Borussia was the first German team to win a European Cup in 1966, against FC Liverpool. However, only six years later, in 1972 Borussia is relegated from Germany’s First Division (1. Bundesliga) to the lower division Regionalliga West, where it remains until 1976. After almost being relegated a second time in 1986 Borussia wins the relegation matches against Fortuna Cologne and thus remains in the First Division. In 1989 the team’s path is back on success, winning the German Cup against Werder Bremen, which marked the beginning of Germany’s most successful team of the 1990s with Borussia being successful in Germany’s First Division – being vice champion in 1992 and winning the championship in 1995 and 1996 – as well as internationally – being UEFA Cup finalist and winning the Champions League as well as the Team World Cup in 1997. Another title was added in 2002 by winning the German championship once again, in addition to being UEFA Cup finalist (Borussia, 2005).

Borussia’s Westfalenstadion, which had been the team home stadium since 1974, was expanded in 1995 in two stages from 45,000 to 69,000 standings and seating places, and in 2002 in a third stage to about 83,000. Likewise, Borussia has the highest spectator average in Europe with 77,335 per game and 1,315,008 altogether (Borussia Aktie, 2005).

October 31, 2000, marks another historical date for the team, Borussia being the first German soccer team to go public and being listed on the German stock exchange TechDAX and transformed from a club (“eingetragener Verein”) to Borussia Dortmund GmbH & Co. KGaA (Borussia Aktie, 2005).

Company Profile

Borussia’s main business is professional soccer. Due to the nature of this industry, revenue is mainly generated through ticketing, merchandising, sponsoring, the sale of TV rights, or player transfers. In addition, the company operates a number of fully owned subsidiaries, including Westfalenstadion Dortmund Verwaltungs GmbH, which owns and operates the stadium; goool.de sportswear GmbH, a textile and sports outfit manufacturer; and Sports&Bytes GmbH, an IT service provider. Apart from this, Borussia holds a 51 percent interest in B.E.S.T.-Borussia Euro Lloyd Sports Travel GmbH (travel agency) and 33.4 percent interest in Orthomed GmbH (orthomolecular medicine) (Borussia Aktie, 2005); another subsidiary, Hotel Lennhof (upscale hotel), was recently divested (Borussia Aktie, 2005).

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Figure 1. Borussia Dortmund Corporate Structure (Borussia, 2005)

Borussia’s strategy is to follow a commercial marketing approach based on sporting success as well as on the brand’s potential appealing to fans, members, and spectators, defined as “commerce with soul” (Borussia Aktie, 2005).

What also needs to be mentioned is that Borussia currently faces a high level of indebtedness, which can significantly threaten its ability to continue its day-to-day business in the medium run and lead to default in a worst-case scenario; thus, the company currently engages in a thorough restructuring process, which includes funding through a 2:1 capital increase and buy-back of the Westfalenstadion (Borussia Aktie, 2004), significantly decreasing personnel costs from about €60 million down to €28 million (Watzke, 2005), and the divestiture of unprofitable subsidiaries (see above).

Also, through the business form of a “Kommanditgesellschaft auf Aktien (KGaA), investors have no vote in and cannot buy out the company (as was recently the case with Manchester United). After going public, Borussia’s stock was issued at €11.00; however, it dropped relatively fast to about €4.00 after only one year of trading. Today, the stock quotes at €2.38, shows a continuing sideward trend with little momentum for the last couple of months, and pays no dividend (Marketwatch, 2005).

Industry Specifics

Professional soccer teams basically generate revenue through ticketing, merchandising, sponsoring, the sale of TV rights, or player transfers. These, however, are strongly affected by a team’s performance and attractiveness (e.g. stars in a team). Besides Borussia, there are only a limited number of professional soccer teams publicly listed on stock exchanges, including AFC Ajax, Arsenal Holdings, AS Roma, Aston Villa, Galatasaray Istanbul, Heart of Midlothian, Lazio Rome, Juventus Turin, Manchester City, Manchester United, Newcastle United, Parken Sport & Entertainment (FC Kopenhagen), and Watford FC (Investment Research, 2004). While some showed positive developments, the majority showed drastic falls, like AS Roma (- 35 percent), Lazio Rome (- 83 percent), Manchester City (-47 percent), and Watford FC (- 67 percent) (Investment Research, 2004).

In addition, soccer stocks tend to be more volatile than general industry stocks and greatly affected by a team’s performance in the various championships and leagues.

Fundamental Analysis

The Balance Sheet

Current ratio = current assets / current liabilities

One important measure for a company’s performance is the current ratio, which equals current assets divided by current liabilities and is a measure of the company’s liquidity and a somewhat degree of safety against fluctuations in the flow of funds (Anthony et al., 2004). According to Borussia’s 2003 annual report, it would be €115,725,939 / €39,651,000 = 2.92 for the year of 2003; this seems to be a sound basis, since its current assets consist of merchandise (€623,000), accounts receivable (€43,637,000), securities (€1,460,000), and cash on hand (€70,006,000), all of which are easily convertible to cash and thus liquidity. Compared to the 2002 and 2001 current ratios, which were €105,929,225 / €36,013,000 = 2.94 in 2002 and €112,292,100 / €38,555,000 = 2.91 in 2001, this ratio represents a quite stable basis to meet current obligations.

Financial leverage ratio = total assets / shareholder’s equity

The financial leverage ratio measures a company’s level of debt by dividing total assets by shareholder’s equity, which shows the extent to which the company relies on debt financing. A value of 1.0 means that the company has no debt; thus, the higher the ratio, the higher the debt. Borussia’s financial leverage ratio in 2003 is €239,282,647 / €149,359,846 = 1.6, representing not only an increased level of debt but also a continuous rise for the last two years (in 2002: €222,490,545 / €148,536,348 = 1.5 and in 2001: €215,002,300 / €147,131,700 = 1.4). This is a cause for concern, since a high ratio indicates possible difficulty in paying interest and principal while obtaining more funding.

The Income Statement

Return on Equity (ROE) = net income / shareholders’ equity

ROE shows how much a company has earned on its shareholders investments by dividing net income by shareholders’ equity. Borussia’s ROE in 2003 is €823,499 / €149,359,846 = 0.005, a very poor result. However, in previous years the result was equally poor (in 2002: €1,404,630 / €148,536,348 = 0.009, in 2001: €-9,012,500 / €147,131,700 = -0.06), thus there seems to be a big problem and a cause for concerns, especially regarding the high unattractiveness for investors.

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