Undervalued Sports and Entertainment Mecca A Slam-Dunk Investment
By: John Persinos, Investing Daily
It’s a common dream to own a professional sports team, but none of them are publicly traded. To get a piece of the action, investors must buy shares in the corporate entities that own the teams.
There’s no better buy now in the sports world than Madison Square Garden Company (NSDQ: MSG), which owns and operates the iconic Madison Square Garden arena, the New York Knicks, the New York Rangers, the Connecticut Whale, the New York Liberty, the Radio City Christmas production, the Chicago Theater, the Beacon Theatre, and more.
The company operates via three segments—MSG Sports, MSG Entertainment, and MSG Media—that are strategically aligned and built on a foundation of brand-name venues and compelling spectacles.
MSG Sports features the presentation of a wide variety of live sporting events including hockey, professional and college basketball, professional boxing, track and field, and tennis. MSG Entertainment presents or hosts live entertainment events such as concerts and family shows. MSG Media consists of regional sports networks and the Fuse Networks, a national television network dedicated to music.
The company is most commonly associated with the value of its eponymous arena, which is undergoing an $850 million renovation that will enhance its earnings power. Opened in 1968 and located in midtown Manhattan, the arena is the longest active major sporting facility in the New York metropolitan area and currently hosts approximately 320 events a year.
This storied landmark is only one aspect of the company’s appeal as a stock market investment. The company’s cable networks, lucrative broadcast rights and fully integrated business model make it a great stock to buy for the long haul.
However, the stock is being unduly punished by investors and trades at a bargain to its premium potential.
In September, the NHL canceled its entire preseason game schedule, because of the absence of a collective bargaining agreement between the team owners and the players’ association. This marks the fourth time in 20 years that the NHL has succumbed to a work stoppage. The regular season is scheduled to begin in mid-October, but negotiations remain far apart.
The National Hockey League remains mired in acrimony, generating negative publicity that tarnishes anything associated with pro hockey. Hockey fans—and investors—remember that the entire 2004-05 season wasn’t played because of a costly lockout. The first casualty of the highly public squabbling this autumn has been Madison Square Garden’s stock.
Along with its ownership of the Rangers, the company also owns the Madison Square Garden network, which airs the team’s games. Without hockey games, ratings and revenue plummet.
Madison Square Garden relies on ticket sales, advertising revenue, concessions, and merchandise throughout the hockey season. However, investors may forget that the health of Madison Square Garden rests more on ironclad broadcast rights than the vicissitudes of its teams. The company recently inked a 14-year deal with CBS (NYSE: CBS) and the NCAA worth $10.8 billion, to show March Madness and other college basketball programming.
Madison Square Garden also signed a $15.2 billion deal with Disney (NYSE: DIS) and the NFL to extend ESPN’s Monday Night Football programming through 2021. In August, MSG Networks and ESPN New York 98.7FM agreed to a multi-year extension that allows 98.7FM to continue as the radio broadcast home of the New York Knicks and New York Rangers.
Moreover, Madison Square Garden has embarked on an ambitious growth strategy to extend its operations far beyond New York, particularly into the sports and entertainment mecca of California. The company and CBS are currently discussing a new media rights deal with the Los Angeles Dodgers, whose owners are in a spending mood to build up the team.
In May, Madison Square Garden announced that it would pay the Faithful Central Bible Church $23.5 million for the historic Forum in Inglewood, California. Home to musical acts over the years such as Elvis Presley, Jimi Hendrix and Nirvana, the Forum is Madison Square Garden’s first West Coast property. The company plans to spend $50 million this year to renovate the property.
A Winning Year
Despite the headline-grabbing tumult within the NHL, Madison Square Garden enjoyed a stellar 2012. For its fourth quarter and fiscal year 2012 ending June 30, the company soundly beat consensus estimates for revenue and earnings.
Fiscal 2012 revenues of $1.3 billion grew 8 percent, compared to the previous year, primarily from an increase in revenues in the MSG Sports and MSG Media segments. Fiscal 2012 earnings reached $106.5 million, or $1.38 in earnings per share (EPS), an increase of 34 percent from the previous year.
Fourth-quarter revenue was $332.9 million, an increase of 42 percent from the same period a year ago, driven by higher revenues in all three of the company’s business segments. Fourth-quarter earnings were $28.6 million, or $0.37 in EPS, a whopping increase of 235 percent from the same quarter a year ago.
Company management credited the fourth-quarter home run on an increase in sports revenue, partly stemming from the 11 home games that the Rangers played in the 2012 playoffs, compared to last year’s two games. The condensed NBA schedule and increasing attractiveness of the facility because of renovations also played a role.
Moreover, 95 percent of Knicks season tickets and 90 percent of Rangers tickets have been renewed for the 2012- 2013 season. Madison Square Garden is charging an average of 9.5 percent more for Rangers season tickets and 4.9 percent more for Knicks tickets, although the Rangers’ revenue won’t be realized in the unlikely event that the entire hockey season is canceled.
The stock’s price-to-earnings (P/E) ratio is about 29, roughly in line with the entertainment sector’s P/E of 28. With lucrative and coveted broadcast deals either signed or in the pipeline, this company is positioned to perform like a champ. For more top picks like MSG, check out one of these free stock research reports.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.