Tickers in this Article: MSG, CVC, LYV, WWE, ISCA
Sports, entertainment and media company The Madison Square Garden (NYSE:MSG) reported a drop in its second quarter profits, largely due to ongoing renovation of its historic arena. Its entertainment segment was hit the hardest, with a substantial drop in revenue and a loss in operating income. (For more on earnings, read Earnings Power Drives Stocks.)

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Renovations Continue
Madison Square Garden earned net income of $8.5 million or 11 cents a share in its second quarter, compared to over $14 million, or 18 cents a share, in the second quarter a year ago. Revenue increased to $233.8 million from $227.1 million, a 3% increase. The ongoing $850 million renovation of the historic Madison Square Garden arena, which is being done in stages, hit the entertainment division hardest. Revenue dipped for entertainment to $36 million, a 23% drop. The arena was closed for much of the quarter, so event-related revenue naturally was lower.

Media revenue rose to $139.6 million, a 4% increase, while surprisingly, the sports segment posted an 18% increase to $75.4 million. Higher playoff-related revenue did the trick here. The company did show operating losses in both the entertainment and sports segments of $14.5 million and $5 million, respectively. The operating loss in entertainment was less than last year's same quarter, while the sports loss was generated, as sports losses often are, by higher personnel transactions as well as higher direct operating costs.

While the basketball team doesn't contribute the most to the income statement, it certainly is, other than the arena itself, the flagship property for the company. NBA fans well know the Knicks failed to land the most celebrated free agent in history, LeBron James, but did add stars Amar'e Stoudemire and Carmelo Anthony to its team, so renovation of its roster as well as the arena continue. How this will play out on the court as well as the bottom line will be fascinating, though of course both fans and investors must first wait to see the outcome of the NBA lockout. (To learn about sport unions and lockouts, read Pro Sports Unions: Do They Help Or Hurt?)

A Confederation of Interests
Madison Square Garden is a kind of hybrid company in that it is more and less than its component parts. Split off from Cablevision (NYSE:CVC), Madison Square Garden has its MSG networks, which operates in its media segment but features regional sports. Sports and entertainment, or pseudo-sports, finds World Wrestling Entertainment (NYSE:WWE) operating strongly in the proprietary end of this sector. In motorsports, International Speedway Corp. (Nasdaq:ISCA) combines sports properties and entertainment venues. But Madison Square Garden is different than all these and has a certain uniqueness to it.

In addition to sports and media with its television, Madison Square's Fuse network for music along with its concerts and theater segment puts it loosely in the space where Live Nation Entertainment (NYSE:LYV) plays. Madison Square also has such diverse properties as Radio City Music Hall, the Beacon Theater and other venues. It has its sports teams, notably the Knicks and the Rangers, which in the case of the Knicks, despite the NBA team's doldrums until recently, still contributes a lot to MSG's high profile and brand. In an age where sports teams are often no longer part of publicly-traded companies and the business of sports itself is a difficult one, Madison Square Garden as a company is bucking a trend.

The Bottom Line
Madison Square Garden arena is an iconic location for boxing, having hosted many celebrated events, including the Ali-Frazier bout 40 years ago, then touted as the Fight of the Century. The current MSG company is living an old boxing axiom that sometimes you have to take a punch to give one; that's what the expensive arena renovation and the overhaul of the Knicks team looks like. The financial punches may be more than one. There's the renovation costs, the extra costs of star players' contracts, and the potential of losing an entire season's revenue should the NBA lockout knock out the entire season. But the Garden has survived the vicissitudes of sports and entertainment in the past, and should continue to do so. As a business entity, the Garden company faces much skepticism, but it's turning its loose confederacy into synergies that can one day pay off. (For more on entertainment based stocks, see Analyzing Show Biz Stocks.)

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