Berko: Athletics, Netflix are overvalued

Dear Mr. Berko: Why have college costs nearly tripled since 2000? My brother, a chemistry professor, earned $71,000 in 2010, and last year, he made $74,000. Even though more students are attending classes, salaries are not increasing, because so many college courses are offered online.

I own 200 shares of Netflix, an investment I bought at $126 a share in August. Should I sell it, or buy another 200 shares, which now trade at $98?

— J.K., Minneapolis

Dear J.K.: Online courses are a cheap, pathetic substitute for live classes that shortchange students and debase the education process.

Since 2010, according to The Huffington Post, more than $10.3 billion has been spent by public universities to boost failing sports programs. The American Association of University Professors released a study in 2014 demonstrating that athletic spending between 2004 and 2011 increased by 25 percent at public colleges. And several weeks ago, a participant in that AAUP study told me that percentage would rise to 47 if 2012 through 2015 were included. The study also showed that NCAA Division I schools increased football head coaches’ salaries by 93 percent between 2006 and 2012. There are 1,066 schools in the NCAA, and 345 are Division I schools. In those years, median pay for professors rose a stingy 3.7 percent, which speaks volumes about America’s perception of education.

Football and basketball are indubitably and incontrovertibly more important to schools than academics. The University of Illinois recently hired a new football coach with a $21 million contract. And Illinois is close to bankruptcy because of its $85 billion unfunded pension liability. In most states, the highest-paid employee is a head coach. The University of Alabama’s Nick Saban makes $6.9 million, while endorsements and speaking engagements add $4 million to his income. Last year, Saban’s Crimson Tide returned $33 million to the university. However, if Alabama’s accountants applied the same accounting principles used by corporate America, that $33 million amount would be in the minus column.

In 2014, only 20 of the 130 NCAA football programs in the top subdivision had “a positive operating margin.” The average loss was $17.6 million per school and perhaps higher, because operating margins refer only to variable costs and don’t include fixed costs. The wastefulness continues because universities hijack funds from other departments when athletic coaches exceed budgets. According to USA Today, student fees at Old Dominion University fund 65 percent of the school’s athletic budget. Meanwhile, Colorado State University borrowed $240 million to build a football stadium. CSU has 24,000 students, so that’s $10,000 per student. The interest and amortization of that debt cost each student about $1,100 every year. If other athletic programs are included, then the Pac-12, the Big 12, the SEC et al. spend about $136,000 per athlete, while academic spending is less than $14,000 per student. In many colleges, it’s easier for students to win letters than learn to write them. Universities care more about getting bigger and less about getting better, and the students get shafted in the job market.

Netflix (NFLX-$98) is not an investment; it’s a rank speculation. In 2015, NFLX earned 28 cents a share, and no company is worth 375 times earnings. That’s insane. NFLX may earn $1 a share in 2016, but even that would be 102 times earnings. The mean target price from Thomson First Call (consensus of 41 stockbrokers) is $125, or only 1 point below your basis, but NFLX’s 1.8 percent profit margins stink. Earnings growth year over year was down 48 percent for the most recent quarter, and trailing operating cash flow was negative $749 million. We’re looking at a more conservatively valued market, and high-flying issues with high price-earnings ratios have less appeal than they had in the past. The NFLX risk is greater than the gain. Sell!

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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