The Value of Prospects

 

Dave Cameron wrote a really interesting article over at Fangraphs that got me thinking about how prospects are valued. I’m going to give you a summary of his points and then jump off from there but you should really go and read it first. It’s pretty long, so I’ll wait.

 

 

Back yet? Alright. Cameron’s thesis is that with Masahiro Tanaka‘s posting and all of the new rules surrounding it, we’re going to see, for the first time, what the market rate is for a top prospect. Cameron also writes that, for international free agents at least, players aren’t being paid a premium for past MLB experience and are actually going to be paid for what they’re expected to produce.

 

The implication is that young players have a lot to offer wherever they’re coming from (as we’ve seen with other internationals like Yoenis Cespedes and Yasiel Puig) and these players are finally being paid what their market value is.

 

We can contrast this to how young players coming up through the minors are paid. Basically, they’ll get a signing bonus (if they’re highly-enough rated) then make peanuts in the minors and relatively nothing (league minimum) for 2-3 years in the majors before their earning power escalates depending on performance. In this case, players get a nice financial tease (in the form of a signing bonus) before needing to prove that they’re worth their future salaries before they actually get a chance to earn it. And some players never get that big signing bonus. They’re the real bargains.

 

This “delayed gratification” (as I’ll call it) results in young players that perform well earning far less than what their value would be on the open market (like Tanaka will). These players are extremely valuable to their organizations because of this.

 

Aaron Sanchez

Aaron Sanchez

 

This is probably the biggest reason why the “Marcus Stroman and Aaron Sanchez for Jeff Samardzija” rumours were so troubling to Blue Jays fans. Why would the Blue Jays give up not one but TWO premium prospects who are both fairly close the majors (Stroman closer than Sanchez) for a good pitcher with only two more years before he hits free agency? From a cost-benefit analysis, it’s a no-brainer of a move. You just don’t do it (and, thankfully, the Jays haven’t done it).

 

For the purposes of the next section, I’m going to treat Tanaka’s value in the same way as Stroman’s and Sanchez’s, mainly because none of them are sure things. Tanaka could pull a Dice-K and spend more time injured and ineffective than healthy. So could both Blue Jays prospects. Both could hit big or both could fail to make things work at a major league level. North American pitching prospects are incredibly risky but so are pitchers with 6 years of international experience with a lot of miles on their arms. There just aren’t enough pitchers with a similar pedigree to Tanaka to know whether he’ll go the way of the Darvish or the way of the Dice-K.

 

If we think that Masahiro Tanaka is worth at least $125 million (including the posting fee) for six years of baseball, then I’ll peg Stroman’s value at $100 million for which, if he’s outstanding right from the start of his major league career, would probably be paid about $20 million over his first six major league seasons. Let’s call this a $80 million dollar savings by the Blue Jays for Stroman’s first 6 years.*

 

Marcus Stroman

Marcus Stroman

 

Let’s say that Sanchez has the same value. He has a higher upside but hasn’t performed as well as Stroman at as high a level and he’s had more of an injury history so we can say that he has more risk associated with him. With the same $20 million in salary that Stroman would probably make (with an outstanding first few years), the Jays are adding another $80 million in value from those two pitchers to give them about $160 million in net value over six years.

 

By contrast, if they had made the trade to get Samardjiza, they’d be getting a pitcher in return who probably has a $100 million value over 6 years on the free agent market. With two more years of arbitration eligibility before becoming a free agent and an arbitration estimate of $5 million this season and even more next season, the Blue Jays would be getting two years of control at about $12.5 million when his open market value over that time frame would be about $33.3 million dollars. Notice, that a North American player who hasn’t yet achieved free agent status is still being paid much less than his open market value dictates.

 

The reasoning for not making this trade is simple economics. Why trade for one player who could probably save you about $20 million over two years when you can hold on to them and reap the benefits to about $160 million over six years.

 

Obviously, this approach is over-simplifying things. Not all prospects are created equally. Not all prospects and players are valued equally by their teams. Additionally, this cost-benefit analysis doesn’t take into consideration when the player is expected to contribute that value. For a team that is desperate to win, they’re going to be willing to take a hit to long-term value in order to win games. This is the rationale to the Blue Jays trading six years d’Arnaud and Syndergaard for four years of Dickey (including the contract extension). The Blue Jays expected to add a pitcher who wouldn’t need a learning curve and would be able to contribute immediately without the growing pains associated with rookies that also eats into their valuable MLB service time.

 

My opinion is that I have a feeling that Stroman can contribute this season. I also think that he could contribute at least half of what Samardzija would. Samardzija had an fWAR (Fangraphs’ WAR) of 2.8 last year and had Steamer and Oliver projections of 2.8 and 1.9 fWAR respectively. His rWAR (from Baseball Reference) of 1.0 in 2013 and, while they don’t give any projections, it’s pretty clear that the bar isn’t as high as some people think. In Stroman’s case, the Steamer projection has him contributing 1.2 fWAR in just 77 innings while Oliver projects 0.5 WAR in 103 innings (Oliver thinks that home runs are going to be a bigger problem for Stroman than Steamer does).

 

In contrast, both projections for Samardzija are for 177 innings pitched which means that if Stroman is a starter and accumulates the same number of innings as Samardzija then even a straight-up Stroman for Smarge trade would be a horrible loss for the Blue Jays.

 

Whether this is a good or bad way to look at prospect valuation is up for grabs but it certainly helps put things in a different perspective.

 

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* Yes, I know that my figures are more conservative than Cameron’s.

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