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Madison Square Garden (MSG) is an entertainment company based out of New York. I think the stock is trading too high relative to the current situation in professional sports, and more specifically, the National Hockey League. With the NHL lockout getting deeper and deeper, will revenues fall enough to hurt MSG stock, as it is the owner of the New York Rangers? Let's take a deeper look at how this could play out.

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Source: Stockcharts.com

First, a look at the recent developments within the NHL lockout are not good. The NHL Players Association (NHLPA) and the owners (NHL) recently met in mediation to try and save part of the season. So far, over 34% of the season has gone by, without one drop of the puck. After two days of mediating, NHL deputy commissioner Bill Daly had this to say on the matter:

"After spending several hours with both sides over two days, the presiding mediators concluded the parties remained far apart and that no progress toward a resolution could be made through further mediation at this point in time. We are disappointed that the mediation process was not successful."

"Remained far apart." This is the one thing that you don't want to hear when a two-day mediation trial ends. For Gary Bettman, the current NHL commissioner, this is the third lockout of his tenure. The last lockout, in 2004, lasted the entire season, costing the NHL millions of dollars in merchandise, ticket revenues and affiliate splits. It also weighed substantially on the fan base, which took years to rebuild to a respectable level.

Now, just when things were seemingly coming back to normalcy, with a strong fan base and plenty of support for the NHL, another lockout has fans' interest severely waning. On February 16, 2004, Gary Bettman officially announced the cancellation of the 2004-05 season. While we are a few months from that date, another cancelled season will all but decimate the fan base, bringing MSG down with it.

With cancellations for 2012-13 season already stretching to December 14th - including the marquee game of the year, the Winter Classic, as well as the All-Star game - and no deal in the near future, this season could be gone too. This will definitely have an effect on MSG going forward in fiscal 2013.

On its most recent earnings announcement, on Nov. 2nd, MSG beat expectations, posting $.37 EPS which topped the consensus by $.15. Revenues of $332.9 million were able to top expectations by $55 million as well. But Hank Ratner had this to say about the potential of the lockout in the most recent earnings transcript, where most of the information below is derived from:

"Turning to the Rangers. As you know, the NHL's collective bargaining agreement with the players association expired on September 15, 2012. As of today, the NHL has canceled pre-season games and all regular season games through November. If the canceled home games are not rescheduled in the second quarter, it would have a material negative effect on the company's revenues, operating income and AOCF in the quarter. If additional games are cancelled and not rescheduled, it could have a material negative effect on our fiscal 2013 results."

While MSG does have the New York Knicks - another professional team it owns - playing a full season this year, rather than a lockout-shortened season like they endured last year, it still won't be enough to compensate for a potential cancellation of the entire NHL season. The New York Rangers generated $199 million in revenues last season, a record high for the team.

MSG as a whole generated revenues of $1.3 billion for the entire 2012 year, an 8% increase from the previous year. As stated above, the Rangers contributed $199 million of the $1.3 billion in revenue MSG generated, or more than 15%. After the Rangers great season last year, that extended rather far into the post-season, many fans were willing and ready to spend big bucks this year to see another great team, with 90% of the season tickets already being renewed.

The fact that the Knicks play a full season this year will help compensate for a reduced or potentially cancelled NHL season, but not enough where revenues won't be affected. MSG received $17 million in direct compensation for the 13 home playoff games played at Madison Square Garden ((arena)) between the Knicks and Rangers. Of the 13 games, 11 of them were played by the Rangers, which on average received $1.3 million per game for a total of $14.38 million of the $17 million.

On a brighter note, despite the lost revenues from the NHL lockout, MSG does not expect to see any liquidity issues. The topic was raised during the conference call, due to the concerns over the stadium transformation, which will cost roughly $980 million. Hank Ratner, the company's President and CEO, had this to say on the matter:

"We can't say that we've factored the potential of an NHL work stoppage into our liquidity planning and we remain comfortable that we have ample liquidity to complete the transformation project and have other business initiatives."

MSG also regionally broadcasts Knicks and Rangers games. With only the Knicks playing this season, the lack of viewers for Rangers games will also hinder the revenue generated from MSG Sports Network. While the NHL season is postponed, the network has been broadcasting shows from its "deep archive library," said Mike Bair, President of MSG Media, during the conference call. While some of these shows may be interesting, they won't replicate the kind of revenues that come from advertisements and large viewing numbers, at least not the kinds that come during Rangers games.

While the full NBA season of 82-games - rather than the 66-game, shortened season last year - will result in more televised games, as well as more home games and will help boost revenues, it won't be enough to compensate for a potential NHL season cancellation. The sooner the NHL lockout is solved, the less of an effect it will have on future revenues. If the NHL season is cancelled, I think MSG revenues could be impacted drastically.

With a trailing P/E ratio of 32, I think MSG trades too high relative to its future earnings. I also think the $.44 earnings per share (EPS) estimate and $431 million in revenues estimate will be too high when MSG reports earnings February 4th of next year, unless an NHL deal is reached relatively soon. I like Madison Square Garden over the long-run, but right now I think they are trading far too high.

Source: Madison Square Garden: A Bearish Outlook Amidst The NHL Lockout