Valuing Stamkos: Estimating What Steven’s Next 7 Seasons are Worth

 This article is being co-posted on Maple Leafs Hotstove as well as on my own site, http://www.originalsixanalytics.com. Find me @michael_zsolt on twitter.

 All season long, Toronto fans have been talking about Steven Stamkos. It is well known that Stamkos will be an unrestricted free agent (UFA) this July. This means that – you guessed it – Steven Stamkos could become a Leaf. Naturally, if it happens, many fans have presumed Stammer would be named captain, immediately become the face of the franchise, and lead the Leafs through its centennial season and beyond.

As a result, many have also asked – what is Steven Stamkos worth? Assuming he reaches UFA status, what will it cost the Leafs to sign him? Does he deserve the same type of money as Kopitar, Kane, and Toews? Back in January, Ryan Kennedy over at thehockeynews.com made some reasonable comparisons and suggested that he sees Stamkos as being worth roughly ~$9M in AAV. Full credit to Ryan – as that was earlier in the season and somewhat different situation – however, in this article I will argue that it is extremely unlikely that any team, Toronto included, will be able to sign Stamkos for an AAV of less than $10M, or for much less than the maximum term of 7/8 years.

Before getting into the approaches to valuation, let’s look at some of Stamkos’ key statistics to understand exactly how he adds value.

Stamkos’ Goals Above Replacement (GAR)

Stamkos GAR BARs

 (If this data doesn’t mean much to you – I recommend you check out my summary of the practical applications of Goals Above Replacement).

For individual player analysis, GAR (Goals Above Replacement) can be a useful starting point to illustrate the big picture. Looking at Stamkos’ GAR shows us:

  • He performs at an elite level, hitting 15-20+ GAR all but his rookie season, something done in fewer than ~6% of all player-seasons
  • Stamkos contributes value to his team almost entirely through his offensive play:
    • 95% of Stamkos’ career GAR comes from his offensive ability, approximately 2/3rd of which coming from his shooting percentage (15.2% at 5v5) and 1/3rd from his impact on shot-rates (Corsi For)
    • At times over his career he has been a slight defensive drag to his team – but ultimately he is a relatively neutral contributor in non-offensive areas
  • As noted in the chart, Stamkos’ 2012-2014 results may not be indicative of his capability as the seasons were impacted by the lockout and his broken leg, respectively

We likely didn’t need GAR to tell us any of the above, as many would know most of this from simply watching Steven. However, GAR will be important to keep in mind for when we estimate Stamkos’ value later on.

WARRIOR Chart

Next, I have copied Domenic Galamini’s WARRIOR chart of Stamkos, showing Steven’s relative performance within the league on a number of metrics. For those not familiar with WARRIOR charts, Dominic provides a great summary here.Stammer solo

Looking at this chart confirms the following:

  • Stammer is an elite scorer and a solid playmaker, scoring very high on Goals/60, Primary Points/60, RelCF60 and RelxGF60
  • Stamkos should not be considered a two-way forward: his defensive contribution is sub-par, as shown by his shot/goal suppression (CA60Rel/xGA60 Rel)
  • As a result, when valuing Stamkos, we should be comparing him to similar elite shooters (e.g. Ovechkin, Kane, Perry), as opposed to the leagues’ finest two-way forwards (e.g. Toews, Kopitar, Bergeron)

Given that elite shooters don’t always excel at driving 5v5 CF%, it will be important to keep in mind shooting percentage and power play results when comparing Stamkos to other players.

Before we get into valuing Stamkos, let’s quickly look at the qualitative side of the equation.

A Note on Intangible Factors

Although the hockey analytics community tends to discount ‘intangible’ factors, I personally consider them very meaningful. Consider: if you have two players with similar stats – would you pay more for the driven, hard-working, high-character guy, or the player who demonstrates none of these traits?

We all know Steven Stamkos is a strong leader. Last season he captained his team to game six of the Stanley Cup final. He also has an incredible work ethic; he is well known for his rigorous offseason training with Gary Roberts. While these strong intangibles are difficult to quantify, they still should play a meaningful role in justifying a premium valuation for Stamkos. But first – what aspects can we quantify?

Approaches to Financial Valuation

In the world of corporate finance – buying and selling companies – great effort is spent attempting to value the businesses being acquired. Generally speaking, there are two approaches:

  1. Relative (market based) valuation methods
  2. Intrinsic valuation methods

Let’s start with relative valuation methods.

Market Based Valuation: Comparable Company Player Analysis

For investors, ‘comparable company’ analysis is a key aspect any deal. The valuation multiples of companies across an industry (e.g. ‘Enterprise Value / Earnings’) set the baseline for determining what the price should be for a similar one. As many readers will know, the exact same approach is often applied to players: we can look at a set of comparable elite shooters to help derive a benchmark for Stamkos’ market value. Keep in mind – relative valuation methods like comparables tell us what others are willing to pay for an asset (the market), not necessarily the inherent or ‘true’ value of it.

Using Corsica’s Similarity score feature, focused specifically on Stamkos’ most important stats (e.g. G/60, P/60, Sh%), I have arrived at the following set of comparables. All players listed below had a similarity score of at least 85% with Steven. I have also tried to present this similarly to how it is done in finance:

Comp Table

(Note – All data shown is all situations, except where specifically noted).

As you can see, few players in the league score goals and contribute primary points at the same rate as Stamkos. Compared to this set as a whole, Stamkos outperforms the group average for all metrics listed, except for the Corsi stats and FirstA/60.

However, for this analysis to truly be relevant, we can only really compare Steven to players in the same free agency situation when signing, i.e. UFAs. As such, I have highlighted the four UFA players that I consider as having the most comparable performance statistics to Stamkos: Patrick Kane, Alexander Ovechkin, Evgeni Malkin, and Corey Perry. I have also shown their four-player average at the bottom of the table. As you can see, Stamkos is neck and neck with these players on every metric.

In terms of dollars, these four players averaged an AAV of $9.7M, and had an average term of the maximum 8 years. Considering that these players are also not historically known for their exceptional leadership qualities – which Stamkos has in spades – you can begin to see the case for Steven to be earning $10.0M-$10.5M+ per season.

Intrinsic Valuation Methods

In financial markets, the other approach to valuation is using ‘intrinsic’ methodologies – e.g., trying to derive what is a company is worth in an absolute sense. When valuing a company, this is based on the discounted ‘present value’ of a company’s future cash flows – how much money a company will generate cash for its new owner in the future.

My view is that the best ‘intrinsic’ player valuation method available based on public stats is using GAR, which I introduced at the beginning. The first approach I will use is valuing a player based on his historical GAR score, which I have shown previously. The second is a new approach, where I will show a high level attempt to forecast a player’s future GAR – and use that to derive what he should be paid. When we have confidence in a forecast for a player – (which I won’t necessarily say about my own Stamkos GAR forecast today) – forward-looking analysis will be the most ‘pure’ measure we can use in valuation.

Historical GAR

First I will plot Stamkos on the Fair Market Value curve, in order to see what he is worth based on what he has done historically. Typically I would encourage using a 3-year average GAR – however, due to the issues of the lock-out season and Stamkos’ injury, I will instead use his career average (ex-rookie season) GAR of 22.

Historical GARLooking at this chart shows:

  • Stamkos’ career Avg GAR/season of 22 values him at $10.8M in AAV
  • However, historical GAR will tend to over-estimate a player’s value, as it is backward-looking, and does not adjust for how players decline with age
  • As such, though this is a useful data point, we should take it with a grain of salt

Forward-Looking GAR: A High Level Estimate

To truly estimate a company’s, or players’, intrinsic value we need a forecast of how it/he is going to do in the future. Of course, like any prediction, this type of estimate is inherently flawed and almost never is how reality actually plays out. However, creating a forecast can help us to see some reasonable scenarios of how Steven might perform in the future. To do this, I will combine his past performance with the aging curve of a typical NHL forward.

Fortunately for us, part 2 of Moneypuck’s Building a Contender Series has an excellent chart that summarizes the league-average GAR aging curve for forwards (is anyone tired of me referring to this series, yet?):

Moneypuck GAR Aging curve

(Source: Moneypuck)

In order to connect this to Stamkos’ expected performance, I will use a rather blunt methodology of simply applying the same absolute value of decline in GAR score showed here to ‘extend’ forward Stevens’ historical performance. The most accurate way to do this would likely be to base Stamkos’ long term decline on how his comparables declined at the same age. However, for the purpose of brevity, I will use this simplified approach to help illustrate the methodology.

Stamkos GAR Forecast

In the chart above I did the following:

  • Extended the ‘historical’ performance by one year in 2015-2016, assuming his current season is comparable to 2014-2015
  • Starting at Stamkos’ current age of 26, I applied the absolute decline from Moneypuck’s chart to Stamkos in five and three year chunks
    • (As you can see, the projection begins to decline more quickly after 2020-2021F)
  • Last, I adjusted this ‘base’ case by +20% and -20% to create illustrative upside and downside cases

Although this is a very high level estimate, I think this gives an interesting, basic idea of what we could expect from Stamkos over the next eight seasons. What does this equate to in terms of dollars? The base case results in an average GAR per season of 18.3, equating to $9.1M per year in AAV. The downside and upside cases each average GARs of 14.7 and 22.0, respectively, coming out at AAV values of $7.4M and $10.8M.

Sizing it all Up

So – lets stack these all up next to each other:

Aggregate

Naturally, looking at a wide range of methods gives a wide range of potential values. However, all three of these approaches can be used to justify a valuation for Stamkos at $10.0M+ of AAV. There is also every precedent for him to get the full 8-year maximum term, or 7 years with the Leafs (in the case of a UFA signing with a new team). We can all be sure Stamkos’ agent is well aware of all of these approaches and will be pushing for the high end, trying to secure as much as possible for his client.

Practicalities of TML’s Negotiation Position

Much like in valuing and buying/selling companies – you can do as many fancy calculations as you want – but something is ultimately worth what someone is willing to pay for it. Given that Stamkos is a UFA, he is essentially able to auction his contract to the highest bidder – putting all of the power in his hands. This power dynamic, combined with the prior valuation approaches, gives me strong reason to believe Stamkos deserves $10M+ – and teams should be willing to pay it, if they have the cap space available.

I’m sure some readers will point out that Stamkos’ basic counting stats (goals/assists/points per game) have declined in the past two seasons, which may be a red flag for the future. Travis Yost and Stephen Burtch both addressed this somewhat, arguing that his quality of teammate and usage are both factors that may be impacting his performance. However, in terms of the value he commands, the strength of his negotiation position will ultimately rule the day. If teams want him, it will take big dollars to get him – either they will be willing to pay for an elite player, or they will not – and I suspect there will be at least one team left standing at a double-digit AAV.

Conclusion

In the end, I know Leafs fans will continue to argue that Stamkos wants to come home, and that maybe he will take a hometown discount to join the Leafs. Although this is possible, in reality the Leafs should not be expecting to walk into a bargain contract with Stamkos. He is an elite scorer, a strong leader, he deserves a top dollar contract, and I strongly believe there will be a team willing to step up and give him the $10M+ per season he commands. Stamkos is entirely worth that amount, and he is an excellent candidate to lead this young Leafs’ team through their centennial season, and six more after that. All us fans can do now is sit and wait.

Your move, Lou.

 

This article is presented by OAK Coasters, where you can buy hand made, One of A Kind (OAK) coasters that make the perfect housewarming gift. Check them out at OAKCoasters.com.

 

 

 

The Importance of Financial Analysis: A League-wide Review of Salary Cap Efficiency

Dimitri Filipovic recently wrote a great article summarizing that – despite the NHL’s rhetoric of ‘parity’ – it is a still a league where the teams’ with the greatest financial resources tend to be the most successful. After reading his piece, I wanted to write a short article building on this concept, where I will show that although having more resources is an advantage, how efficiently a team manages its salary cap space is just as important as how much they spend.

In this piece I will apply the same methodology I have used previously, where I showed how the Goals Above Replacement (GAR) metric can be used to quantify both a player’s and their team’s salary cap efficiency. I will apply the same methodology in order to do a league-wide review of salary cap efficiency in 2014-2015. Doing so, I will argue that (i) salary cap efficiency is an integral lens for all teams to look through when building their roster, and (ii) although an efficient use of salary cap alone will not win a team the Stanley cup – ignoring this type of financial analysis can quickly push them out of Cup or playoff contention entirely.

Determining Team-level Salary Cap Efficiency

Salary Cap Efficiency is defined as how effectively a team uses its salary cap space, based on a bottom-up analysis of each individual player.  To calculate it, I first derive the fair market value of all players as a function of their GAR (FMV = $575K + ($467K * GAR)). Then, I compare that to the Average Annual Value (AAV) of each player’s contract – his cap hit – in order to see if he is being over or under-paid. By aggregating this analysis for an entire team, you can see (a) which player contracts on each team are the most cost-efficient, and (b) approximately how well that team manages its salary cap as a whole.

As a quick refresher, here are two previous charts that summarize the cap efficiency of the 2014-2015 Chicago Blackhawks. The first chart shows all members of the team in relation to the Fair Market Value equation that I just described. The second shows the amount of value created or lost on each individual’s contract.

Hawks - Arbitrage line

Hawks - by player calc

You can see from this that – as the Stanley Cup winning team – most of Chicago’s players are quite close to the FMV line, with only a few exceptions (Seabrook, Toews, Saad). Also, to be clear, we should never expect a team to price/negotiate any given player’s contract ‘perfectly’ – there will always be far too many changing variables in that player’s performance in the years after signing. However, a team can be most competitive by largely signing players with positive GAR, and by generally paying them within a reasonable range of their FMV – or much less, as enabled by their ELC/RFA deals.

In the second chart, I also want to draw your attention to the ‘Net Value Created/(Overpaid)’ figure shown under the legend, of -$6.3M. This figure is the sum of all individual player amounts displayed on the chart. Keep it in mind, as it provides the core of my analysis in the next section.

 (Side note: this Net Value Created figure for the Blackhawks specifically will not tie perfectly to my analysis in the next section. The next section is based on team 2014-2015 GAR scores, where the chart above is based on 3-year average GAR).

Application Across the League

Now, I will apply this type of analysis across the league in order to show which teams had the most cap-efficient roster in 2014-2015, and how that may have impacted their results in the standings. Given this is a GAR-based analysis I will start by showing the total Goals Above Replacement of all teams in the league.

Chart 1 - GAR by team

Looking at this, a few things are worth pointing out:

  • The vast majority of playoff teams are concentrated on the left hand side of this graph, and likewise the non-playoff teams are on the right
  • There are obviously exceptions where teams likely should have made the playoffs, but didn’t (e.g. BOS, LAK), or teams that did make the playoffs and maybe shouldn’t have (CGY, VAN)
  • Although this is a sample of only one season, I think it supports the validity of GAR as having a strong connection with a team’s success – despite only being available retroactively

In order to keep this brief I will fast forward a few steps (e.g. I will not show the calculations for getting the FMV of each team’s roster, and subtracting their total salary cap hit from that). Instead, here is the result, which is the Net Value Created/Overpaid for each team over the season, in absolute dollars.

Chart 2 - Net Value Created by team

Although this is a useful way to look at how well a team spent, it is also impacted by their total salary cap dollars. Given Dimitri’s point about the varying spending power across teams, it is important to look at this on a basis that is directly comparable across teams. As such, I have calculated each team’s ‘Salary Cap Efficiency %’ by simply dividing their Net Value Created by their total cap hit. The larger the percentage, the more efficiently a team has managed its cap.

The chart below shows the relationship between where a team finished in the playoff race along with its Cap Efficiency %. To be clear – a higher percentage (top of the chart) is a more efficient use of cap space, and a lower percentage is a worse use of cap space.

Chart 3 - Team Level Cap Eff - A

Here are some observations from this chart:

  • Most playoff teams are above 0% on cap efficiency – e.g. successful playoff teams are not wasting money by overpaying for players
  • Notably, Chicago was barely above 0%, having won the cup, and both Nashville and Winnipeg were in the ~30% range, while both being eliminated in the first round – showing that maximizing salary cap efficiency clearly won’t win you the Stanley cup on it is own

As Filipovic’s article made clear, greater financial resources will always help a team get the best talent, despite their efficiency or inefficiency. This chart does not highlight which teams spent the most overall, and naturally if two teams are getting the same ‘bang for their buck’ (spending at equal efficiency), the team that spends more will of course win out.

Despite this, a team can very easily ruin its own chance of being a contender by failing to look at its roster through a properly quantified salary cap efficiency lens. Below is another version of the same chart, where I have highlighted the large and unfortunate set of teams whose inefficient use of cap space has very likely impacted their ability to be a contender.

Chart 4 - Team Level Cap Eff - B

Fortunately for the teams in the bottom left quadrant, I think they are all well aware of their situations, and doing everything in their power to undo the current mess they find themselves in (with maybe one exception).

Conclusion

To wrap up, I think it should be clear that any team not conducting salary cap efficiency (or similar) analysis when contemplating its long-term roster construction is taking a significant risk. Being the most cap-efficient team may not be able to win you a Stanley Cup on its own (which Boston and San Jose learned the hard way in 2014-2015) – but having a very poorly managed cap is uniquely capable of taking your team out of contention. All that being said, we of course should keep in mind that cap efficiency is only one piece of the puzzle – to use dollars efficiently a team first has to acquire players worth spending money on.

 

Using GAR to Quantify a Player’s Value and Salary-Cap Efficiency (Part 2)

(OSA’s WAR “Explainer” Part 2) 

This article is being co-posted on Maple Leafs Hot Stove as well as on my own site, http://www.originalsixanalytics.com. Find me @michael_zsolt on twitter.

In my last article I walked through what the WAR/GAR metric is, and the practical applications, and limitations, of using it to evaluate individual players. In this post I would like to build on that work to (i) show how to use GAR to quantify what a player is worth in dollars, (ii) introduce the concept of ‘contract arbitrage’, and (iii) use that concept to review the cap efficiency of Jonathan Toews, Dion Phaneuf, P.A. Parenteau and Brad Boyes.

GAR and Quantifying Player ‘Value’

In a salary-capped league, NHL franchises operate under a series of constraints:

  • Maximum of 50 contracts per team
  • $71.4M salary cap in 2015-2016
  • $52.8M salary minimum
  • Minimum NHL-level salary of $575K
  • Maximum NHL-level salary of $14.3M (20% of the cap)
  • Maximum Entry Level Contract (ELC) base salary of $925K, or $3.78M after performance bonuses

As you can see, the Collective Bargaining Agreement (CBA) defines the limits that teams must optimize within. When faced with this, the concept of opportunity cost becomes extremely important. Opportunity cost is the implied cost of a decision by not choosing the next-best alternative available at the time. Think of signing a 35+ year-old to a five-year, $35M deal. Even if that player is a strong contributor, the team’s opportunity cost (five years of losing ~10% of their cap) will often make these deals unjustifiable, especially as that player’s performance declines over time.

Having looked at GAR and player evaluation, I now want to incorporate contract dollars to show how to use GAR to quantify player ‘value’. To do this, I will be focusing on salary cap impact (rather than annual salary paid), as that is what matters to teams when making contract decisions – at least those that aren’t more constrained by their own finances than the cap (e.g. ‘budget’ teams). As you may know, salary cap hit is calculated by the league as the average annual value (AAV) of a player’s contract.

The central approach I will be using to value players is based on some very helpful past analysis by Eric T and Hawerchuk. Amongst many other things, their work showed us the following:

  • 1 win (WAR) = ~6 goals (GAR)
  • Based on the free agent market and the current cap, every 1 WAR a player contributes is worth $2.8M in contract value
  • After adding in the baseline salary ($575K minimum contract, AKA a zero-GAR player): the market ‘price’ of a 1 WAR or 6 GAR player is approximately $3.4M in player salary per year

Estimating Player Value: Some Initial Examples

One way to connect our $2.8M cap-dollars per win to players is to simply insert it into the table I shared in my last post. Doing so will give a range of estimated player ‘value’, shown in terms of contract dollars against the cap.

Expected Contract Dollar by WAR Range

Hopefully this table helps demonstrate an initial idea of what these players are ‘worth’, based on their GAR scores. However, much like my previous draft-pick-value analysis, what works well for a range is not necessarily as applicable on an individual basis. Instead, showing this on a curve can help us assign players a more precise estimate of the value they contribute, and deserve.

The Cap Efficiency Curve

To demonstrate this, I have created the chart below, which I will call the ‘Cap Efficiency Curve’. This curve illustrates the linear relationship between a player’s cost (in contract AAV) and the GAR/WAR a team should expect from an individual with that level of compensation:

Player Value vs Cost Curve

The relationship shown above is relatively straightforward, directly derived from our earlier concepts – that each 1 WAR/6 GAR is worth $2.8M in AAV, above the player’s minimum salary. Hopefully this visualization can help turn the general relationship into an intuitive, usable tool for a team. For example, this curve allows us to:

  1. Evaluate if a player is outperforming/underperforming expectations in his existing contract
  2. Define the ‘fair’ market price for a player’s future contract, based on what he has been able to do historically, and ideally, based on what we can project he will do in the future

One note: as you can see, the equation above only holds between the minimum and maximum player salary levels, as a player currently cannot be paid less than $575K or more than $14.3M per season.

Now that we have a good understanding of what a player is worth – how can a team leverage this relationship to ensure they use their cap space as efficiently as possible?


‘Contract Arbitrage’: How to Take Advantage of Market Inefficiencies

The word ‘arbitrage’ can have multiple meanings, depending on whether it is being used in a very technical, financial sense, or a more general one. More generally, people use arbitrage to mean buying something for less than it is worth. Like a typical ‘value’ investor, this is done by conducting detailed research to figure out an asset’s ‘true’ value, before searching for opportunities to acquire it at a very good price. After purchase, value investors typically hold assets (companies) for a very long time, often continuing to invest their dollars, time and expertise in order to maximize future growth, profits, and investment returns.

Applying this value investing arbitrage to the world of NHL contracts brings me to the idea of ‘Contract Arbitrage’. I will define ‘Contract Arbitrage’ as any situation where a team receives more value from a player’s contract than it costs them. Specifically, that would mean earning more in WAR/GAR than the team gave up in equivalent cap-space, making contract arbitrage a measure of cap-efficiency as much as it is ‘financial’ value. While GMs are most obviously focused on acquiring talented hockey players, a key component of the job of a GM is to maximize his team’s wins per cap dollar spent.

Let’s go back to the Cap Efficiency Curve to illustrate this concept:

Value vs Cost Curve - ShadedLooking at the above:

  • Fair market value (FMV) for a player would be any contract value along the curve shown
  • Overpaying for a player would be a contract that falls into the area above the curve (shaded red)
  • Creating value (e.g. signing a player with the potential for contract arbitrage) would be any contract that falls into the green area, below the curve
    • Simply put, the green area represents any time a team pays a player less than the goals/wins he contributed to the team would justify

For simplicity, I will focus my upcoming examples on past performance, in order to illustrate these concepts. In the truest sense, teams should be using this concept on a forward-looking basis. For example, if a team can reasonably forecast a 20-22 year old to reach 10, 15, or 20+ GAR over the next 5+ years, they should be inclined to ‘lock in’ his contract now – ideally within the green area of the chart above. Keep an eye on Aleksander Barkov’s GAR performance over the next few years, as he may grow into an excellent example of such a contract.

Now – let’s get into those examples:

Our Original GAR Case Study: Jonathan Toews

I will start with Jonathan Toews in order to connect this analysis back to the player evaluation case study from my last post. Toews’ 3-year average GAR is 20.3, and his current AAV is $10.5M on a contract with seven years remaining. Plotting Toews’ GAR together with his contract dollars on the curve below will help us see if he is currently being over, or underpaid. The curve will also allow us to see how much over/underpaid Toews is – measured by the distance between his (x,y) coordinates and the FMV line.

Contract Eval - Toews

  • As shown above, plotting Toews’ onto the Cap Efficiency Curve shows he is ‘worth’ ~$10.1M (e.g. where his ~20 GAR hits the curve)
  • Compared to the $10.5M AAV he currently takes of the Blackhawks’ cap, this would show Toews’ to be paid quite close to his fair value, receiving a ‘premium’ of only $400K

Although Toews’ performance has started to show slight declines, I would argue that Toews’ contract appropriately reflects his FMV. Teams will never be able to predict exactly how a player will perform, but the Blackhawks have come pretty close here. Further, this calculation doesn’t attribute any value to qualitative factors, such as the incredible leadership, work ethic, and experience that Toews brings to his team. In my view, these factors will more than offset the $400k premium that the Blackhawks are paying.

Now let’s look at an example at the opposite end of the spectrum…

Former Toronto Maple Leaf: Dion Phaneuf

First, I want to go on the record and say that I had written almost this entire article and analysis of Dion prior to the recent announcement of his trade to the Senators. As a result of that announcement, I now get the benefit of no longer explaining to the world just how bad Dion’s contract is for the Leafs, and how hard it will be for them to offload it. So that is nice.

Second, I will deliberately avoid getting too far into reviewing the trade directly, as there are many other good examples of people who have done so already. My big picture ‘take away’ is that I was very impressed by the Leafs’ ability to source and negotiate a deal that rids them of his contract, with zero salary retained. I also will say that, from the seat of a Leafs’ fan – i.e. supporting a team that has always been overflowing with cash, and is only constrained by the cap – it can be hard to appreciate this deal from the Senators’ perspective.

However, I think the swap has more positives for the Senators than most think. In this trade, the Sens found a creative way to convert very unproductive cap space (injured/inactive players) into a contributing asset (Dion) with a similar cap hit, only for a longer term. Further, James Mirtle’s insightful tweet summarized that the Sens’ actual cash out the door for next season went down by $4.2M after this deal. For a budget team, that cash compensation change is arguably just as valuable as offloading an additional $4.2M in salary cap – all while picking up a solid, top 4 defensemen.

Now – let’s take a look at Dion’s contract.

Contract Eval - Phaneuf

  • Plotting Dion’s $7M AAV and his 3-year average GAR of -3.4 (2012-2013 to 2014-2015) paints a dismal picture
  • Relative to the FMV line, Dion is being paid $6.5M per year more than he contributes to his team’s goal differential
  • The most pessimistic way of looking at this (which I’m sure will make most Leafs’ fans glow), is to directly multiply the $6.5M loss by the five remaining seasons on his deal: giving a total maximum overpayment/loss of value of $32.5M

However, much like we couldn’t reasonably interpret the first graph as simply ‘Toews is overpaid’, I think we need to caveat this analysis for Dion as well – even if that only results in being nice to Sens fans. To qualify this analysis of Phaneuf’s contract:

  1. First, as shown in my last post, GAR doesn’t necessarily include every aspect of how defensemen contribute to their teams – thus, it may understate the value of Dion, or any other D-man
  2. Second, this data also only includes up to 2014-2015; the eye-test alone makes it clear that Phaneuf has stepped up in the current 2015-2016 season. The change in Dion’s usage and minutes under the Babcock regime have likely bumped up his recent GAR considerably – and to Ottawa’s credit, they were buying into Dion’s play this year, not his play over the three years before this one
  3. Last – I legitimately believe Lamoriello and Babcock’s comments that Dion is an excellent leader, person, and guy to have in the Leafs’ dressing room. I think this was providing a lot more value to the Leafs than us number-crunchers tend to give credit for – and it will be missed

Going forward, the same analysis above can be applied to see if Dion is living up to his contract any better in the future than he has historically. By tracing his $7M over to the FMV line, we can see that a $7M AAV player ought to be in the 13-14 GAR range each year. Thus, if Dion’s GAR for 2015-2016 and onward come out anywhere north of 10, Ottawa will be looking a lot better than we all are currently giving them credit for.

For one last example, let’s look at the free agent signings done this past summer by the Leafs’ current front office:

Brad Boyes and P.A Parenteau

Brad Boyes and P.A. Parenteau are consummate examples of the strong decision-making process and asset management analysis that Shanahan, Lou, Dubas (and likely Brandon Pridham) may be implementing. Boyes and Parenteau each have 3-year average GARs of 5.1, and 5.2, respectively – almost contributing 1 WAR each to their prior teams. On the cost side, Boyes was picked up for an AAV of only $700K and Parenteau for an AAV of $1.5M. Here are the charts to evaluate their respective contracts:

Contract Eval - Boyes

Contract Eval - ParenteauAs the charts above show, given the fact that a ~5 GAR player is typically worth $2.9M, as long as Parenteau and Boyes perform in line with their recent history, the Leafs will have immediately created a combined $3.6M in salary cap value when they signed these two players. Further, being more than halfway into the season, the value that Pierre-Alexandre has brought on the ice thus far speaks for itself. Finally, none of this analysis even factors in the potential ‘exit’ value that Lamoriello & Co. could pick up by offloading P.A. or Brad for picks or prospects at the deadline, which is hopefully made easier by their very minor cap requirements.

Conclusion

To wrap up, the great work done by the likes of Hawerchuk and Eric Tulsky has provided us with the perfect framework to dig deeper into using GAR to quantify player value. Hopefully this article has been helpful to walk through those concepts, illustrate what this relationship looks like visually, and to show how the Cap Efficiency Curve can be a useful tool for analysis of player contracts and salary negotiations.

Building on these concepts, within the constraints of the CBA, the most legitimate, ‘fair’, and repeatable way for a team to maximize their cap efficiency is to either focus on acquiring young players in the draft, or by trying to trade for prospects early into their tenures as NHLers. As such, the upcoming third part of this series will focus on how teams can take advantage of Entry Level Contracts and Restricted Free Agency to consistently generate contract arbitrage opportunities for themselves, and maximize their wins per cap dollar spent.