Growth In MSG's Garden

By Aaron Levitt | May 05, 2011 AAA

New York: if you can make it here, you can make it anywhere. And just like the old saying, mid-cap Madison Square Garden (NYSE:MSG) seems to be doing just that. MSG, which is the owner of its namesake arena and Radio City Music Hall, has been making all the right moves lately and recently achieved the highest level of adjusted operating cash flow in the company's history. However, a recent analyst downgrade has given investors a chance to own a real cash flow machine at cheaper prices.

TUTORIAL: Stock Basics

Great Franchises
After being spun-out of its parent company, Cablevision (NYSE:CVC), Madison Square Garden has taken on a life of its own. Year to date, the stock has risen about 4% and soared over 30% over the past year. What's more impressive is how many long-term analysts view the company. Many estimate that MSG will be capable of generating $3 a share in cash by 2013, up from 85 cents last year. Long-term targets for the shares are at 14- to 15-times free cash flow or about $45 to $46 a share.

What's building these exciting estimates is Madison's interesting blend of businesses. One part Discovery Communications (NASDAQ:DISCA), one part real estate investment trust and one part sports fanatic, the stock has a three pronged approach to making money. The New York company is best known for its arena on Manhattan's West Side, but it's also the proud owner of the New York Knicks, the New York Rangers and a couple of other professional sports franchises. With the Rangers making the NHL playoffs and the Knicks recently signing basketball phenom Carmelo Anthony, MSG's sports franchises are seeing increased ticket sales, and they returned to profitability in the fourth quarter. Anthony's debut for the Knicks saw the highest ratings for a regular-season Knicks game in over 16 years, quadrupling average viewership. MSG's management is also planning to invest nearly $800 million into renovating its main arena over the next two years. The company expects to fund that investment with cash on hand.

The real jewel in MSG's crown is its media business. The company owns and operates MSG Networks and MSG Plus, which have exclusive broadcasting rights to New York area sports games. The media business also includes the Fuse Network, which distributes programming to subscribers around the country. The growth of its sports franchises ultimately help the media properties with higher affiliate fees and advertising sales. Media revenue jumped 12.1% to $144.1 million in the fourth quarter.

Some Risks
Recently, Dish Networks (NYSE:DISH) made a move to drop MSG last fall in a dispute over carriage fees and the Garden's massive renovation could eat into the revenue from live events, hurting its entertainment unit. Several analysts also believe that cost overruns due to the renovation could be an extra $150 million or so. Finally, higher ticket prices could be too much for a strapped consumer to bear. Season tickets for the Knicks are scheduled to jump by about 50% in 2012.

50 Cents On The Dollar
Despite the potential risks, MSG represents an interesting growth option for a portfolio. Analysts at GAMCO peg the total value of the company at nearly $4.1 billion dollars, more than double its current market cap. The sports teams, including the New York Liberty of the WNBA, are worth about $1 billion alone. That value could be potentially realized if MSG's controlling shareholders, the Dolan family, moves to take the company private, as some analysts expect. The family owns nearly 70% of the voting rights. Even if the buyout doesn't materialize, investors get access to improving cash flow, strong crown jewel franchises and the prospective for future dividends when they add MSG to a portfolio.

Bottom Line
For investors looking to add a great blend of growth and value to a portfolio, Madison Square Garden could be a great addition. Offering some of sports' greatest teams as well as a growing media outfit, MSG has the potential to be a great long-term winner for any portfolio. With many analysts predicting that the shares are worth at least double, now may be the time to pounce. (For related reading, also take a look at The Professional Sports Portfolio.)

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