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Undervalued Sports and Entertainment Mecca A Slam-Dunk Investment (MSG, DIS, CBS)

October 22nd, 2012

John Persinos: 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 (NASDAQ: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.

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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.

This article was originally published on Investing Daily by John Persinos.


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