Analyst: Why Madison Square Garden Is A Better Bet Than MSG Networks

Madison Square Garden completed a split into two companies: Madison Square Garden (MSG) and a media company named Madison Square Network (MSGN). Initial analyst reaction appears to be mixed, as demonstrated by John Janedis of Jefferies who is bullish on Madison Square Garden and bearish on Madison Square Networks.

Janedis noted that MSG is the "same company" with "significant" balance sheet strength and a path to profitability through organic growth. The company's "different story" stems from the fact that it's business mix is no longer reliant on advertising and affiliate revenue. "Without the scrutiny of sub losses / uncertainty surrounding the pay-TV ecosystem, the new MSG offers a unique play on the value of sports and Live Ent, as well as the optionality of the intrinsic value of MSG's underlying asset base," Janedis wrote. Janedis continued that MSG also inked a local TV with MSGN which will improve the profitability of Sports. Moreover, MSG will benefit from the expanded national agreement for the NBA in fiscal 2017, which will result in a revenue growth of six percent CAGR (compounded annual growth rate) over three years. Finally, MSG also received a cash infusion of $1.46 billion (pursuant to the spin), of which $525 million are allocated towards share purchases. The remainder is expected to be used to finance acquisitions a the company looks to expand its brand. Shares are Buy rated with a $185 price target.

Commenting on MSNG, Janedis pointed out that the media sector has seen hurt by concerning headlines of subscriber declines which creates a tailwind for advertising revenue. The analyst noted that MSGN's network "have not been immune" as the company lost three percent of its subscriber base last year, underperforming the industry's one to 1.5 percent average decline. Janedis continued that MSNG's financial position isn't as solid as MSG. The company is expected to generate a free cash flow of $83 million (seven percent free cash flow yield) in fiscal 2016. There is no anticipated return of capital to shareholders while capital expenditure requirements are "minimal." The company will therefore use its "significant" free cash flow to de-lever its balance sheet to 3.8x by fiscal 2018. On the other hand, the analyst stated that there is "incremental upside" to advertising following the Knicks' worst record in franchise history (17-65) as ratings to Knicks games "stand to improve" while the Rangers' roster is mostly similar to their President Trophy. Bottom line, MSGN's subscriber losses represents the "900 pound gorilla for investors" as cord cutting is "likely to drive" subscriber numbers even further. Shares are Hold rated with a $20 price target.