McIntyre Capital Management, a private investment company, released its first quarter 2023 investor letter. A copy of the same can be downloaded here. The strategy returned 35% gross and 28% net in the first quarter, compared to the Russell 2000 Value’s decline including dividends of -1%. The year started with a strong market but bank failures and rising cyclical risks pulled back the performance. In addition, please check the fund’s top five holdings to know its best picks in 2023.
McIntyre Partnership highlighted stocks like Madison Square Garden Entertainment Corp. (NYSE:MSGE) in the first quarter 2023 investor letter. Headquartered in New York, New York, Madison Square Garden Entertainment Corp. (NYSE:MSGE) engages in live entertainment business. On May 26, 2023, Madison Square Garden Entertainment Corp. (NYSE:MSGE) stock closed at $35.04 per share. One-month return of Madison Square Garden Entertainment Corp. (NYSE:MSGE) was 7.98%. Madison Square Garden Entertainment Corp. (NYSE:MSGE) has a market capitalization of $2.055 billion.
McIntyre Partnership made the following comment about Madison Square Garden Entertainment Corp. (NYSE:MSGE) in its Q1 2023 investor letter:
“After the quarter’s end, Madison Square Garden Entertainment Corp. (NYSE:MSGE) completed the spin of the MSG arena, a catalyst I had been eagerly anticipating since it was announced in August 2022. The company separated into a SpinCo consisting of the MSG Arena and the Rockettes franchise, which assumed the ticker MSGE, and a RemainCo consisting of the Sphere development and MSG Networks, now renamed SPHR. To avoid confusion, I will refer to the company prior to the spin as “Original MSGE” and the SpinCo as “MSGE” going forward. As I anticipated, MSGE’s form-10 included guidance and historical financials which were far above bear concerns and matched my projected earnings. $40 vodka sodas are indeed profitable. MSGE is now trading ~$32, yielding an EV of ~$2.3B which implies ~15x 2023 EBIT of $150MM, and ~21x fully taxed levered FCF/sh. of $1.50. While at first glance the stock appears reasonable yet not exceptionally cheap, MSGE will pay minimal cash taxes until FY2027, allowing rapid deleveraging and share buybacks, which along with modest MSD EBIT growth should result in $2.50 in fully taxed FCF/sh. by 2026. Further, MSGE retains the air rights above the MSG Arena, which I value at $300-$500MM and I believe will be monetized in the next five years. Given the “hidden assets” and predictability of MSGE’s iconic holdings, I believe shares could double in the next five years, a strong return given the low-risk nature of these assets.
However, while the fund maintains a significant investment in the economics of MSGE, I believe SPHR is the more attractively priced piece. In the spin, SPHR retained a 1/3rd stake in MSGE, resulting in SPHR owning ~0.5 shares of MSGE for every one share of SPHR. At market prices of $32 for MSGE and $30 for SPHR, the market is ascribing ~$14/sh. for the remainder of SPHR, or $490MM given 35MM shares outstanding. For this $490MM investment, we get 1) the Sphere development, 2) the MSG Networks equity, and 3) an estimated $200MM in cash, net of the recently announced sale of Tao and further capex and start up costs for the Sphere. Given the $2.2B construction cost for the Sphere, not to mention opex already spent developing content and the ~$500MM of prime Las Vegas Strip land LVS contributed to the project, the market is effectively valuing the Sphere at cents on the dollar before it even opens. I find this even more interesting given the recent string of positive news regarding the project. Last week, tickets for the Sphere’s opening show with U2 sold out in a matter of days. SPHR and the band are now set to open the venue in late September with a run of 17 shows for a total of ~340,000 tickets. Further, I believe the shows have an average ticket price close to, if not greater than, $500. There is an exceptionally wide gulf then between the market, which seems to discount the very viability of Sphere as anything beyond a spectacular bust, and Sphere customers, who seem excited to pack the value at prices well ahead of national averages. To size the opportunity, if the Sphere’s Vegas residency business is consistently booked, say three packed shows a week for 40 weeks a year, combined with just modest execution on advertising and owned attractions, I believe the Sphere can generate over $1B in sales and over $200MM in operating profits, which at 15x valuation would yield ~$100/sh. for SPHR including its MSGE stake. I believe there is room for reasonable upside to both profits and multiple if this occurs…” (Click here to read the full text)
Madison Square Garden Entertainment Corp. (NYSE:MSGE) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 19 hedge fund portfolios held Madison Square Garden Entertainment Corp. (NYSE:MSGE) at the end of first quarter 2023 which was 20 in the previous quarter.
We discussed Madison Square Garden Entertainment Corp. (NYSE:MSGE) in another article and shared Third Avenue Small-Cap Value Fund’s views on the company. In addition, please check out our hedge fund investor letters Q1 2023 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
