How To Play Madison Square Garden

By Matt Cavallaro | December 23, 2011 AAA

Madison Square Garden, Inc. (Nasdaq:MSG) is trading as a pure momentum play. The NBA is back for the 2011-2012 season and that has sent MSG shorts hoping for a canceled season running for cover. The crucial season has now arrived for MSG investors.

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Pick and Roll
Madison Square Garden earns revenue through its sports segment, media assets and events held at the eponymous arena. A landmark of New York City, MSG is the home to two of the most profitable professional sports teams, the New York Knicks and New York Rangers. In addition, MSG owns The Chicago Theatre in Chicago and leases Radio City Music Hall and the Beacon Theatre, in New York City. (For related reading, see The 5 Most Expensive Stadiums In The World.)

It was a rocky 2011, as renovations at "the world's most famous arena" and the lockout mitigated some of the momentum that MSG built from its revitalized sports franchises. Disruption from the Madison Square Garden Transformation will impact revenues over the next two years, as well. Even with ongoing renovations, MSG made $21.3 million during the fiscal first quarter on revenues of $177.6 million. Strong media business, by far the largest component of total revenues, powered the better-than-expected earnings.

Lockout Temporarily Blocks Momentum
MSG's strong operating performance has played out in the share price. To an even greater extent, the stock has mirrored much of the trials and tribulations of the National Basketball Association and the Knicks. Shares of MSG languished through the early portion of 2010, before building momentum into the February trade that brought superstar Carmelo Anthony. The stock peaked two months later in mid-April at $28.68, then the Knicks were summarily dispatched in the first round of the playoffs. The ensuing NBA lockout pushed the stock below $23 a share. As the prospects for a 2012 NBA season materialized, MSG skyrocketed above $29 a share.

The strong stock price correlation to the Knicks is clear; last January, Forbes estimated that the value of the New York Knicks franchise surged 12% year-over-year to $655 million. It's almost a certainty that the signature NBA franchise will have a higher value when the new list comes out next year, thanks to the addition of Anthony and a vastly improved roster. Add in the New York Rangers, the National Hockey League's second most valuable franchise, valued at $507 million, and that accounts for more than half of Madison Square Garden's $2.2 billion market cap. (For related reading, see The Most Expensive Sports Tickets.)

Sell out rates for the Knicks and the Rangers are extremely strong, with both teams expected to compete at a very high level all year. Renewal rates for season ticket holders, which serve as proxies for fan interest, are in the 90% range for the Knicks and in the mid-80s for the Rangers.

Cablevision
There's a lot of near-term catalysts to propel MSG. One major concern for MSG investors is management, specifically Executive Chairman of the Board James L. Dolan. After succeeding his father, Charles Dolan, as President and CEO of former MSG parent company Cablevision Systems Corporation (NYSE:CVC), Dolan has earned a reputation for being enigmatic and disruptive, particularly in regards to the sports franchises.

Dolan also serves as President and CEO of Cablevision, which itself is a company struggling for direction. After spinning off MSG in 2010 and AMC Networks Inc (Nasdaq:AMCX) this past June, it has been speculated that the Dolan family is still trying to take Cablevision private. Investors overwhelmingly prefer a sale to Comcast Corporation (Nasdaq:CMCSA), Time Warner Cable Inc. (NYSE:TWC) or Verizon Communications Inc. (NYSE:VZ), where natural synergies could be realized. Having divested valuable assets without a clear future for the company, shares of Cablevision have been relentlessly pounded this year, down almost 60%.

The Bottom Line
Despite the management issues and disruptions from two more off-season shutdowns, MSG is a cash generating machine. There's no dividend, but investors have already realized a 48% return since MSG went public nearly two years ago. Momentum from the Knicks franchise and related media assets are medium-term catalysts that justify a premium valuation. If the Knicks get off to a hot start, like the Rangers have, and they have a team capable of doing so, an increase in MSG Network viewership could push the stock back toward the all-time high of $30.37 and beyond. (For related reading, see How Much Are NFL Teams Really Worth?)

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At the time of writing, Matt Cavallaro did not own shares in any of the companies mentioned in this article.

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