IS JUSTIFY WORTH $75 MILLION?

When American Pharoah won the Triple Crown in 2015, Ashford Stud (a subsidiary of Coolmore Stud in Ireland) announced a stud fee for 2016 of $200,000.  However, some mare owners reportedly were able to negotiate a lower stud fee and American Pharoah’s stud fee was subsequently listed as “private.”  American Pharoah’s book has consisted of over 200 mares per year.

Coolmore Stud also purchased the breeding rights to Justify.  Although the figures have not been confirmed, Coolmore may have agreed to a purchase price of $60 million with another $15 million added on if the colt won the Triple Crown.  If this is accurate, what is the likelihood of the $75 million outlay turning out to be profitable?

Following are five “what-if” models, each with its own set of assumptions pertaining to cash flow.

Model 1–Assumptions and Payback-Period Calculations:

Based on what Coolmore Stud did with American Pharoah, Justify will be bred to over 200 mares.  If he can get, say, 85% to 90% of them in foal at an average stud fee in the range of $125,000, Coolmore would show a strong positive net present value return on investment by year 5, assuming a discount rate of 8% (see note at end of article) to account for the cost of capital, the diminishing value of money over time, and the risks that come with investing in a live asset, such as fertility problems, injury, or death.

Now consider four additional models, three of which have far more conservative assumptions and yield less rosy projections.

Model 2

Justify gets 130 mares in foal at an average stud fee (not the listed stud fee) of $100,000.  At a 8% discount rate, it would take slightly over eight years to recoup $75 million paid in full in 2018.  The net present value of Coolmore’s investment would turn positive in year 9, when Justify would be 12 years old.

Model 3:

Justify gets 130 mares in foal annually.  His stud fee averages $100,000 for three years and then drops to $50,000 based on the disappointing appearance of his foals.  In this case, at a discount rate of 8%, it would take over 17 years for net present value to be positive…and Justify would be 20 years old.

Model 4:

Justify gets 130 mares in foal annually.  For the first three years his stud fee averages $150,000 and then rises to $200,000 based on the outstanding looks of his foals.  At a discount rate of 8%, the Coolmore investment would have a positive net present value during year 5.

Model 5:

Justify is sterile (as was the 1946 Triple Crown winner Assault) or gets a low percentage of mares in foal.  In this case, collect the insurance money (and likely take a substantial loss) as the late Allen Paulson did with Cigar.

In conclusion, Coolmore’s chances of turning a hefty profit on an investment of $75 million look encouraging, especially since Justify’s offspring won’t be running in races until mid-to-late year 4 and after that year’s breeding season is over.  Thus, even if his offspring are not particularly talented as racehorses, it would take at least four years to find this out and have that fact reflected in a markedly lower stud fee.  And if Justify sires a relatively high percentage of graded stakes winners and remains fertile, cash flow and profits will soar and $75 million will look like a bargain.

In addition to income from stud fees, Coolmore will be able to race or sell Justify’s foals from the mares Coolmore breeds to him.  This will assist in shortening the payback period.

Copyright © 2018 Horse Racing Business

Note:  Some analysts would apply a higher discount rate than 8% because of the risky nature of cash flow from an asset that is subject to injury and premature death.

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