Linsanity may have died down, but our interest in the world renowned sports venue that the Knicks call home remains high. People may not realize that Madison Square Garden (NASDAQ: MSG) was spun off from Cablevision (NYSE: CVC) in January 2010 and owns more than just the eponymous Madison Square Gardens. The company is an integrated media and sports company with ownership of the New York Knicks basketball team (NBA), the New York Rangers hockey team, the New York Liberty basketball team (WNBA), and two sports networks.
MSG reported earnings in early May, beating expectations. Both the affiliate media and sports segments performed well. In the media segment, revenues were up 12.6% to $65 million, driven by a $10 million increase in affiliate revenue. This was impressive given the dispute it had with Time Warner, which had an estimated $17 million setback. Thanks to New York Governor Andrew Cuomo’s intervention, a new carriage deal was struck between the two entertainment giants. The new deal will contribute $32 million a quarter versus $48 million for two quarters under the old deal. Many attribute the increase in advertising to the temporary Linsanity craze that occurred, which boosted ratings significantly for the Knicks. We agree with that analysis though note that it may be non-recurring since Lin suffered an injury. The sports segment also outperformed with revenues up 37% to $216 million. MSG was able to benefit from the additional four Knicks games, ticket price increases for both Knicks and Rangers games, and sponsorships. For this year’s season, MSG raised season-ticket prices by 49% for the Knicks and by 23% for the Rangers. Even in the face of such steep increases, over 90% of Knicks season-ticket holders and over 85% of Rangers season-tickets holders renewed their tickets for the 2011-2012 season. Now that’s what I call pricing power.
Currently one of the main overhang on the stock is the billions MSG has committed to upgrading the Madison Square Garden event venue. The company reaffirmed guidance of $980mn in total anticipated capex for the year. As of the earnings announcement, approximately 70% of the budget had been allocated. Note that they expect another $250 million in capex in FY 2013. The capex should prove to be money well spent, resulting in top-of-the-line facilities after the renovations are complete. Management reported that the “transformation project” is on-budget (MSG & MSG theater will be closed after the NBA and NHL season end this summer). We would’ve liked to hear an update from management on the rumored purchased of the LA Forum, a landmark venue in Inglewood, CA, but there was no commentary.
What we really find compelling about MSG is the company’s free cash flow generation capabilities. After the renovation is complete, MSG should be able to generate approximately $175million to $200 million a year in FCF (assumes maintenance capex of $60 million and the same amount in taxes).
Sports is an interesting industry that commands an inexplicable loyalty from fans whose spending habits have proven to be fairly inelastic even during economic downturns. Fans have continued to pay for premium tickets to live events even when the economy was at its troughs. MSG has some unique assets that have high barriers to entry—it’s going to be tough to build another MSG in the heart of New York City. Even though the stock is up almost 20% in the past few months, we still think there is room for another ~20% of upside. Thus, we are inclined to agree with hedge fund managers Steven Richman, David Gallo, Christian Leone, and John Rogers who are all holders of the stock.