Pujols and his dreaded contract

I'm going to go out on a limb and take credit for Albert's first home run in 16 games. Yesterday, in my return to the blogging ring, I made a point to show Albert some love. Here's the full quote:

Let's give some love to Albert. Sure, he's not doing as well as last year numbers-wise, but old boy is at it again.

I showed Albert some love. That's all he needed. A little less lambasting about his "struggles," a little more sultry sweet talk to get his mind right. It's the secret to life - show a little love, get a little love back.

Speaking of love, I love how Ryan Howard's mid-season contract now means that Albert will no longer be a Cardinal. It's like Ramen noodles. Instant storyline without much substance. The fact of the matter is, Albert probably is worth more than $25 million a year. Howard is receiving $25 million from his new contract, and it's within every realm of rationality that Albert would be worth 20%-50% more than Howard. However, the Cardinals still hold a club option for $16 million in 2011. No matter what, Albert will be here for his age 31 season.

J.C. Bradbury has an interesting take on how much Albert could command when his contract expires.

So, how much is Albert Pujols worth if commands a salary in line with what Ryan Howard received? Yesterday, I estimated that Howard was worth about $19.5 million per year over the term of his contract, so $25 million is approximately 28% more than his projected worth. If Pujols signed a deal for the same timespan, I estimate that he would be worth $40 million per year. Thus, if Pujols received a premium similar to Howard’s, he would be worth $51 million per year, almost exactly what Law estimated.

This scenario is interestingly analogous to making the decision to buy a company.

First, you must project the expected cash flows of the targeted company, then discounting them to find the Net Present Value. In this case, cash flows would be estimated production. Which metric you would use would be personal preference, but my guess is it would be objective measures of player worth like OBP, SLG, and more sabermetric stats. You would then take those projections and monetize them much like FanGraphs converts Wins Above Replacement to dollars. Those dollars could then be discounted. That would be the $19.5 number J.C. came up with.

Second, you calculate target company worth by multiplying share price by the number of shares outstanding. This would be analogous to what the perceived market value of the player would be. Finding close player comps - perhaps A-Rod and Howard in this case - would be as close as we could get to what the market might value Pujols at.

Thirdly, you make the decision whether or not to purchase the company by comparing projected value with market value. Typically, a 10-20% premium on the share price is needed to successfully purchase the company. If NPV is already 0 with the current market price, then you probably won't be able to buy the company, since a premium would make NPV drop below 0 and thus be unprofitable. Comparably, you would make the decision whether or not that player is affordable, based on what your projections forecast. I would guess that a 10-20% premium over the market price is probably still applicable in the free agent market, although there are other factors like "hometown team" and "winning ballclub" that could affect how much a player will accept.

Putting it all together, if Albert's market value is estimated to be around A-Rod's $28 million, then a 20% premium on that would be around $34 million. I don't think Albert will command $50 million like some are saying, and I think a realistic number would be between 30 and 40. The decision would then be with the Cardinals' forecasted projections and whether they would provide $34 million worth of production a year. If not, then it would be prudent to let him walk. At least, that's what we're supposed to rationally do.

In the end, no one really knows what Albert will command until this season and next is up. For now, let's just not worry about it.