Madison Square Garden Vs. MSG Networks: Which One's A Better Buy?

• Shares of Madison Square Garden Co MSG have 4.44 percent over the last one month, while those of MSG Networks Inc MSGN have declined 75.36 percent over the past 3 months..
• Morgan Stanley’s Ryan Fiftal initiated coverage of Madison Square Garden with an Equal-weight rating and price target of $185, while downgrading MSG Networks from Overweight to Equal-weight, with a price target of $21.
• Although Madison Square Garden offers positively skewed risk-reward, Fiftal believes that there are few catalysts over the next year. For MSG Networks, Fiftal expressed concern regarding the risk from sports free and skinny bundles.

“Light on Catalysts”

According to the Morgan Stanley report, the separation of the cable net business from the teams/venues assets has “forced the market to value the latter on a sum-of-the-parts basis that better reflects its higher private market value.”

Although the discount has narrowed, as compared to the pre-spin levels, Fiftal believes that the continued discount is indicative of uncertainty regarding how the Dolan family would act to close the discount, if at all.

Fiftal believes that the key drivers for the stock would be “(1) the perception of private market value and (2) the probability of closing the discount, rather than the near-term economic performance of the teams/venues.”

At the same time, Fiftal does not expect the controlling Dolan family to sell these “trophy” assets, given that a sale within the next couple of years could put the tax-free nature of the spin off at risk.

Madison Square Garden has allocated $1 billion for “strategic growth investment,” which Fiftal believes could include expansion of live entertainment venues.

Post Spin Outlook

For MSG Networks, Fiftal said that Regional Sports Networks (RSNs) “typically derive an outsized portion of their revenue from affiliate fees which are paid on a variable per-video-sub basis by multichannel video providers, creating downside risk from cord cutting or cord shaving.”

Also, independent RSNs are likely to be exposed to above-average risk of being left out of the new smaller video bundles, given that RSNs could be a cost reduction target and independent RSNs do not have the protection of a larger portfolio of content assets.

“In recent years, MSGN has been losing paying subs at an above average rate and we see rising risk that above-average losses persist,” the Morgan Stanley report stated.

“Also, the controlling Dolan family's recent sale of CVC suggests they are amenable to selling 'core' holdings. However, there are few buyers with sizable RSN portfolios, and it is unclear if either have an appetite to put more capital to work in the broadly challenged cable network ecosystem,” Fiftal explained further.