Earnings Preview: Madison Square Garden

Feb.23.11 | About: The Madison (MSG)

By Roger Choudhury, Lead Editor

With the news that Carmelo Anthony is coming to the New York Knicks, we at Investment Underground took a look at shares of Madison Square Garden (NASDAQ:MSG).

Over the past five days, the share price is up 3% to $28. Within the last trading day, shares hit a new 52-week high. Using a P/E to EPS growth rate ratio of 1, a current P/E of 28.8 implies a 28-29% growth rate over the next 12 months. The forward multiple is 24.8x. Recent earnings history confirms the expectation of a higher multiple. In the first nine months of 2010, EPS expanded to $0.66 compared to $0.06 in the same period in 2009. Revenues also increased 11.3% to $724.4 million, and profits went up to $50.6 million from $4.2 million.

MSG is now in solid financial health. The current ratio is 1.7. On January 28, 2010, the company entered into a credit agreement with a syndicate of lenders providing for a new senior-secured revolving credit facility of up to $375 million with a term of five years. The revolving credit facility requires the company to comply with the following financial covenants: A maximum total secured leverage ratio of 3.50:1.00; and a maximum total leverage ratio of 6.00:1.00. In addition, there is a minimum interest coverage ratio of 2.50:1.00 for Madison Square Garden, Inc. As of September 30, 2010, the company was in compliance with the financial covenants in the revolving credit facility.

The company releases Q4 2010 and FY 2010 results on Wednesday, March 4. The company classifies its business interests into three reportable segments: MSG Media, MSG Entertainment, and MSG Sports. MSG Media produces, develops and acquires content for multiple distribution platforms, including content originating from the company’s venues.

MSG Entertainment creates, produces and/or presents a variety of live productions, including the "Radio City Christmas Spectacular," featuring the Radio City Rockettes, and shows that the company co-produces with Cirque du Soleil, such as "Wintuk."

MSG Sports owns and operates sports franchises, including the New York Knicks of the National Basketball Association, the New York Rangers of the National Hockey League, the New York Liberty of the Women’s National Basketball Association, and the Hartford Wolf Pack of the American Hockey League, which is the primary player development team for the Rangers. MSG Sports also features other sports properties, including the presentation of a wide variety of premier live sporting events.

The company conducts a significant portion of its operations at venues that are either owned or operated by it under long-term leases. The company owns The Madison Square Garden Arena and The Theater at Madison Square Garden in New York City, as well as The Chicago Theatre in Chicago, and leases Radio City Music Hall and the Beacon Theatre in New York City. The company also has a booking agreement with respect to the Wang Theatre in Boston. With few catalysts around and a relatively rich valuation, MSG shares look good for your watchlist but not for your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.