Should You Invest In Linsanity?

| About: The Madison (MSG)

The Overview

It's not everyday that the athletic prowess of a single person propels an entire company's shares to record highs. Then again, its not everyday that a Jeremy Lin comes by. Jeremy Lin, now the starting point guard for the New York Knicks, has reinvigorated the New York Knicks franchise. He was an instrumental playmaker in the Knick's five consecutive wins, the longest of the season, a fact made even more astounding considering Knicks heavyweights Carmelo Anthony and Amare Stoudemire were absent for most of the run. As Marley Seamen, AP Business Writer, notes, the combination of Lin's role as the first NBA Asian-American player, a devout Christian, and a Harvard graduate has resulted in "Linsanity" gripping the entire league. Investors have taken notice: shares of The Madison Square Garden Co. (NASDAQ:MSG) have gradually trended upward until they soared 3.69% to $32.30, an all-time high, on Monday. MSG is now up around 10 percent since Feb. 3, the day before Jeremy Lin's breakthrough game.

Source: Yahoo! Finance
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The Catalyst

Madison Square Garden, a services company that operates sports, entertainment, and media businesses primarily in the United States, is poised to directly benefit from "Linsanity," which has provided a much-needed catalyst for this company's share prices. Here are some interesting facts:

  • Ticket prices for Knicks games at Madison Square Garden are up 27 percent since Jeremy Lin broke into the NBA spotlight through leading the Knicks to a win over their regional rivals, the New Jersey Nets.

Source: SeatGeek

  • Knicks merchandise sales are No.1 overall in the NBA since Lin's breakthrough game.
  • Jeremy Lin's No. 17 jersey is the NBA's top online seller since February 4.
  • The Knicks' average household television rating is up 70 percent since Lin moved into the starting lineup.
  • Five of the NBA's 10 most popular items are Knicks-related since Linsanity began.

The rejuvenation of the New York Knicks franchise and the ensuing demand of fans clamoring to watch Jeremy Lin in action can be best expressed by the price differential in stadium seats: the cheapest seat in the Knick's upcoming game against the Toronto Raptors is $44, while the same seat in the Raptor's subsequent game against the San Antonio Spurs (who have a better season record than the Knicks) is $12.50.

Moreover, MSG's NHL team, the New York Rangers, are also experiencing success, winning three games in a row and leading the Eastern Conference. The combined value of the Knicks and Rangers is more than half of MSG's total enterprise value. So, with the success of MSG's sports franchises and the wave ove Linsanity sweeping across the nation, should you invest in The Madison Square Garden Co.? Li Ouyang, a Manhattan resident sums up the general investor sentiment: "We even talked about buying MSG stock because of him [Lin]."

Not So Fast

Despite the huge impact on merchandise and ticket sales, Linsanity's direct financial impact on Madison Square Garden as a company will most likely be insubstantial. As Miller Tabak analyst David Joyce notes, increased Knick's merchandise sales would be worth only "single digit millions," constituting the impact of "a rounding error compared to not having the ad revenue or affiliate fees." However, Linsanity could benefit MSG in other ways. As Mr. Tabak also notes, "Rangers and Knicks fans do tend to buy the stock when the teams are doing well," and the Lin fervor could quicken resolution of an ongoing dispute between MSG and Time Warner Inc (NYSE:TWX). This dispute over rate increases has resulted in Knicks games on the MSG Network not being broadcast on Time Warner Cable, affecting more than 2 million Time Warner subscribers. The huge ratings Lin has garnered could provide increased leverage for MSG and lead Time Warner Inc back to the table. If the dispute is resolved, it could generate substantial revenue for MSG.

The potential of Linsanity and the prospect of constructive progress in talks between Madison Square Garden Co. and Time Warner Inc. paint a somewhat positive short-term picture of MSG. Moreover, the worst bite of the NBA lockout is now behind MSG, with its immediate effects in the rear-view mirror of its dismal second-quarter results.

However, investors should tread carefully if they're considering significantly investing in MSG in the long-term. The Average EPS Growth of MSG's last 3 quarters is -16%, and the 3-Year Sales Growth Rate is a paltry 5%. For the current year, MSG's EPS figures are expected to decrease 8.73%. Moreover, the Annual ROE of MSG is extremely low at 6.7%. In order for MSG to prosper in the long term, it needs more than a dose of Jeremy Lin.

The Verdict

Madison Square Garden is a company that is riding high on the waves of Linsanity as well as increased fortunes and investor optimism. Recently, analysts at Needham initiated coverage of MSG with a "Buy" rating, while analysts at Morgan Stanley improved their rating of MSG to "Overweight" from "Underweight." Madison Square Garden Co. could prove to be a sound short-term play, but there are still significant challenges for it in the long-term.

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