Why the David Ortiz Contract Extension Was a Smart Decision by the Red Sox
Señor Octubre, Cooperstown, or simply Big Papi. David Ortiz has many nicknames, and after signing a contract extension with Boston this week, it looks like Red Sox Nation will continue to use them until the slugger hangs up his cleats. My colleague, Daniel Kline, says Ortiz's new deal is "a mistake," but I disagree -- I'll explain.
He's still elite
The popular argument against the contract extension is this: Ortiz is 38 years old, he's a big-bodied player who could break down, and with $16 million guaranteed in 2015 and vesting options for the following two seasons after that, the Red Sox are overpaying for sentimental reasons. As Mr. Kline writes, "paying him in the future based on past performance is a precedent these owners should not set."
That makes sense -- MLB franchises should always look ahead when doling out multi-million dollar contracts. But this line of reasoning doesn't apply to Ortiz because, put simply, he's still elite. The Red Sox clearly understand his injury risk -- they started him at first base only six times last year -- and in the batter's box, Ortiz remains one of the best in baseball.
Image via Keith Allison, Flickr.
In 2013, he finished in the top 10 in the AL MVP voting, and in the top 10 of nearly every major hitting category. In that same light, ESPN's David Schoenfield recently wrote: "From ages 32 to 34, David Ortiz hit .257/.356/.498. From ages 35 to 37, Ortiz hit .311/.401/.572.... As offense went down in recent years, Ortiz went up."
There are historical precedents
One reason for this appears to be Ortiz's ability to cut down on strikeouts, but a 15% power boost and a 20% improvement in the average department almost never happen after a player matures in his late 20s. On the eve of retirement, it's even more rare. Still, there are historical precedents that suggest he could continue to be valuable to the Red Sox through the end of his current contract.
Last year, at 37, Ortiz had the tenth best slugging percentage of all-time among players of the same age. On average, this top-tier group saw its power-hitting ability fall by 3% into their age 38 season. Through age 41, average slugging dropped by nearly 25%.
Average Slugging Pct.
*Minimum 310 plate appearances. Baseball-Reference. Data is presented as "top 10 age 37 seasons," "top 10 age 38 seasons," and so on.
This tells us that Ortiz should be about 75% of the power hitter he is presently at the end of his current contract. Despite this decline, he'd remain a top 50 bat. And because the average cost of an MLB win is estimated at $5 million, Ortiz should be worth right around $16 million per season even if his production drops off as the data above suggests.
The bottom line
Granted, these projections are far from exact science, but Mr. Kline's idea that the Red Sox are overpaying for the twilight of Ortiz's career is unfounded. If he stays healthy, they've valued him fairly.
Of course, that's a big if. Boston is on the hook for $10 million per year if they decide to exercise the contract's options for 2016 and 2017. That means it'd be tough for Ortiz to justify the value of his deal if he's out for longer than a half-season. But that's why it's called an "option." If the injury bug does strike over the next two years, it's possible the club will cut ties with Ortiz after 2015.
Regardless of when he retires, though, one thing is a near-certainty: He'll leave baseball as a member of the Red Sox. For a player who Yahoo! Sports says is "already arguably of Hall of Fame caliber," that's something that cannot be overlooked. Click to read why my colleague Dan Kline disagrees.
The next step for you
Baseball season is right around the corner. Regardless of how well your favorite team performs, the key for your future is to turn business insights into portfolio gold through smart and steady investing ... starting right now. Those who wait in the dugout are missing out on huge gains and putting their financial futures in jeopardy. The Motley Fool is offering a new special report, an essential guide to investing, which includes access to top stocks to buy now. Click here to get your copy today -- it's absolutely free.
The article Why the David Ortiz Contract Extension Was a Smart Decision by the Red Sox originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.