Astros' Profitability: What Does It Mean?

USA TODAY Sports

Chron.com reports that Forbes says the Astros made $99 million this season.

The Chronicle cites a Forbes report that the Astros are on course to earn $99 million in operating income this year.  The Astros have not responded to a request for quotes, but I wouldn't hold my breath waiting for a response with much substance, because major league teams are loathe to provide details regarding their financials.  The Forbes article is here.

I don't spend much time keeping up with twitter, But I have been told that "the twitter folks are crazy mad."  The Forbes article certainly plays to the things that create the anger, like a headline that says "2013 Houston Astros: Baseball's Worst Team Is Most Profitable in History."  I'm not sure what this headline means, by the way.  It's the most profitable Astros' team?  It's the most profitable in all of baseball history?  The article says that the Astros' operating income is higher than the "estimated operating income" of the last five World Series teams combined--which is certainly an attention getting fact (...or estimate).  But I don't know know what the comparable numbers are for other teams this season.  This appears to be a banner season for MLB team profits, given new sports network deals, the in-flow of shared revenues from national broadcast deals, and shared profits from a highly successful MLB advanced media venture.

Not surprisingly, the profitability news has focused attention on the Astros' meager player payroll at the major league level.  And that's probably fair to an extent, since the very low payroll has significantly decreased expenses. (Although I will note that the Forbes and Chron.com articles don't mention the substantial sums that the Astros have spent on prospect bonuses over the past two years, at the same time that they point to the low ML payroll.)  Presumably the anger is based on the view that the Astros should have had a high payroll this year because they could afford it.

Personally, I don't buy into that view.  I understand that people can have different opinions about whether the Astros' payroll and free agent spending is reasonable.  I think there can be reasonable arguments on both sides.  But I don't think that the Astros' profitability is an important element of that argument.  The crux of that debate should center on the appropriate strategy for putting the Astros back on course for sustained winning over the long term.  Reasonable people can agree on "sustained long term winning" as a goal, but reasonable minds can disagree on the trading and free agent spending strategies for getting there.  But I don't think the Astros' current profitability has much to do with the discussion.

As a person who scrutinizes costs and profits for a living, I have some reservations about reaching strong conclusions regarding the Astros' financial position based on the information available to me.   Maybe that's just my problem.  People on twitter are free to make conjectures without a lot of information.

Just for clarity, let's recognize the difference between "operating income" and "net income." Both are important pieces of information, but you should have both in order to evaluate a firm's profitability. Operating income (sometimes called "EBIT" for those into the jargon) doesn't include one time events, income tax expense, interest expense,or profits/losses from affiliated ventures.  Net income is what is known as the bottom line, because it reflects actual profits to the owners.  The numbers reported by Forbes are the former term--- operating income, not net income.

The Astros have $275 million in debt, according to Forbes; so omitting interest expense is no small matter in examining the profitability of the team.   Forbes notes that the Astros may be using the operating income to pay down the debt.  And that could be a very good idea.  Just ask Tom Hicks, the former Rangers' owner, what can happen if you run up too much debt.  And if you are wondering why the other owners aren't screaming about the supposed most profitable team in history, perhaps it's because they don't mind if the team's earnings are being used to pay off a $55 million loan from MLB.

This makes some of the more inflammatory conclusions in the Forbes article questionable.  For example, the article suggests that the $99 million could have been used to sign up a team equivalent to the NL All Star team.  Maybe this is true if you assume that the Astros' effective tax rate is zero.  (Maybe it is, but I'm not willing to make the assumption without any information to that effect.)  And maybe it's true if you assume that the Astros' lenders will forgive the team's interest payments.  And, of course, the analogy ignores the fact that most of the actual players on the NL All Star team were not freely available for the Astros to sign in the last off-season.

Another important factor here is the much maligned regional sports network, CSN Houston, which Forbes says is the main source of the Astros' profitability.  The operating income figure includes $80 million in revenues paid by CSN to the Astros, but excludes the Astros' losses as majority owner of CSN-Houston.   The Forbes article recognizes that this makes the $99 million earnings number misleading, and attempts to estimate a loss for CSN which is then used to provide another rough estimate of the Astros' operating income ($70 million).    Maybe I'm just too cautious.  But I am skeptical of Forbes' conclusion regarding the impact of CSN.  I suspect that the contractual agreements are very complex, and I don't totally trust an estimate of the CSN losses when the actual contractual terms aren't available.

And what about the rumors of the future demise of the CSN-Houston venture?  These may or may not be accurate.  But unless CSN Houston resolves its carriage disputes and becomes profitable, can we say that CSN-Houston provides a strong foundation for the Astros to go on a spending spree on multi-year player contracts?

Rather than inspiring anger, the Forbes' estimate should provide some cautious optimism for Astros' fans.  After all, the report is contrary to  the creeping fears expressed by some commenters at TCB that the Astros simply don't have the financial capability to spend money.  The Forbes article concedes that this could be "good news" for Astros fans because:

Although Crane is making money off of the old formula now, he could make even more if he ups payroll and fields a team good enough to draw fans back to the ballpark — and more importantly, back to their television sets.

Returning to the difference between operating income and net income, operating income is sometimes portrayed as the better indicator of the future viability of the firm's core business.  And that's why the Forbes estimate may provide cautious optimism for Astros' fans.  When the Astros' prospects blossom into a winning core, the money should be there to sustain a long term winning team.   I'll wait for that time in the future before I point any anger at the Astros' owners.

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