FWONK - Formula One Group: Building The Brand But A Separate Listing Could Help

2023-08-23 10:21:26 ET

Summary

• Formula One Group's net earnings improved significantly in 2022, but declined in FH 2023.
• FWONA is investing in its business, with a focus on the upcoming Las Vegas Grand Prix.
• The value of Formula One teams has risen dramatically, and the number of races is increasing, causing stress on team personnel.
• Liberty Media should consider spinning off Formula One Group in a separate listing.

Investment Thesis

In our previous analysis of Formula One Group ( FWONA ) ( FWONB ) ( FWONK ) back in March this year, we upgraded the stock from a Sell to a Hold based on improved financial results.

The net earnings attributable to Liberty stockholders from Formula One common stock was $558 million in 2022. This was a big improvement from the loss of $190 million in 2021. For simplicity, we will refer to Formula One Group just as FWONA in this article, although it is divided into three classes of common stock, namely Class A, B, and C.

The Formula One Group consists of Liberty Media’s ownership of Formula One Group and some minor motorsport-related assets plus the Las Vegas property at the racetrack.

With FWONA having published its financial results from FH 2023, it is a good time to revisit the thesis to see if the growth momentum is continuing.

FH 2023 Financial Results

The revenue for FWONA in FH 2023 was $1.1 billion. It was the same in 2022. Costs related to FWONA’s revenue were $725 million, which was $4 million less Y-o-Y.

However, the net earnings of FWONA attributable to Liberty’s shareholders declined considerably from $66 million in FH 2022 to a loss of $7 million in FH 2023. A drop of 91%.

This translated to a loss per share of -$0.03

From trying to dissect their rather intricate accounts, we can see that there are fairly large Capex payments done in connection with the upcoming Las Vegas Grand Prix. During the conference call to analysts, held on the 4th of August, the management communicated that they expect capex related to the Las Vegas race, including both the paddock building structure and track-related expenses, to be close to $400 million.

About $155 million of this was incurred in the FH of the year.

FWONA is still investing in its business. This is clearly seen from their cash flow statement for FH 2023

As of the end of June, FWONA had attributed cash, liquid investments, and monetizable public holdings of $1.4 billion, which includes $1.1 billion of cash.

They had $2.4 billion in debt at the end of FH 2023.

We are not too concerned about the large drop in earnings in FH 2023, as their business is best analyzed on an annual basis given the variability in the year-over-year race calendar.

FY result for 2023 should not be much lower than FY 2022.

Valuation

Let us start by stating that the value of the intangible assets of owning Formula One Group is huge. It is the second most viewed sport in the world, after soccer, with hundreds of millions of viewers globally. It is a powerful brand.

Liberty Media paid $4.4 billion for Formula One Group back in 2017. We believe it is worth considerably more today. The market capitalization for the group is $15.36 billion.

However, when we only look at tangible assets, the story is somewhat different.

Seeking Alpha gives it a grade of C- .

It is only the Price/Book on a forward basis which looks attractive. The large gap between Price/Book on a trailing basis and forward basis may stem from the fact that FWONA as we earlier alluded to, is investing a lot of Capex at the moment.

Business development

Liberty Media has done a good job of elevating the interest in Formula One. They deserve credit for this.

Prior to buying out Formula One Group from its previous owners, the finances of the team that compete in Formula One were rather poor. The large teams with backing from car manufacturers and a company like Red Bull, could spend nearly a billion dollars a year. Smaller teams had to fight to survive.

This has changed. The value of a Formula One team these days, even those racing at the back, has now risen dramatically. It is on the back of this development that more racing teams, such as Andretti Motorsport in the U.S. also want to enter the world’s “premier motorsport league”.

FWONA pays out roughly 63% of its EBITDA to the teams. How much each team gets is based on how many points they score. The irony in that is that it is the richest teams that generally score the most points. Cost caps for the teams were introduced for the 2021 season when the budget cap was $140 million per team per season. It was reduced to$135 million this year and will stay at that level up to and including 2025.

The number of races keeps increasing. This must be under pressure from FWONA. The plan is to increase the number of races to 24 for next season with the return of China on the calendar. With so many races, we believe it is reaching a saturation stage. It is also causing a heavy burden and stress on team personnel.

The Share and its Price

We want to remind our readers that FWONA and the other classes of stocks are tracking stock. These are a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performance of the company as a whole.

FWONA has been buying back shares over the last couple of years. This way, at least we can see that there is some indirect form of return of capital to shareholders.

In Q2 of 2023, FWONA repurchased 1.1 million shares in settling the inter-group interest that was previously held at LSXM for $67,50 a share.

Although we know that past performance, such as a share price, is not related to what it will do in the future, we still like to look at it. And when doing so, the duration of time makes a big difference.

FWONA has followed the general market, reflected in the S&P 500 tracking ETF ( SPY ) quite well, except for the last few months. The performance is quite poor over a 1-year period, but when we look at the performance over a 5-year performance it has been very good.

Conclusion

A rising share price is crucial if a company does not pay any dividends.

The only way you as an investor can be remunerated by investing in FWONA is through a higher share price since they have never paid a dividend and has no stated intention of doing so.

According to SA data, hypothetically, if they were to distribute a dividend of 50% of its EPS, the yield would still be negligible.

We are not a fan of intricate inter-related company transactions. It is complex to follow the flow of money and the relationship between all the pieces in the jigsaw puzzle called Liberty Media.

That is one negative aspect of FWONA which holds us back from potentially investing in it.

Therefore, it was positive to see that Liberty Media decided to split off their Atlanta Braves Holdings into a C-Corporation as a separately publicly traded company on NASDAQ ( BATRA ).

With the large value of Formula One Group and the huge global following, we are of the opinion that it would be beneficiary to Liberty Media if they split off FWONA as a separate publicly listed company too. It would result in more clarity and would be easier to follow which would garner more interest from the public.

With hundreds of millions of viewers taking a keen interest in Formula One, it is safe to assume that many of them are keen investors too.

With the prices they can command for F1 tickets, it is certainly not a poor man’s sport.

To conclude, we want to see a simpler corporate structure and a clear path to some dividend from Liberty to shareholders as a percentage of the earnings from FWONA. Until that takes place, we will continue with our Hold stance.

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