Madison Square Garden Group-A Modern Day Roman American Coliseum And Entertainment Icon

| About: The Madison (MSG)
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-To do good, sell what people need, to get rich, sell what they want-Anonymous but wise individual-

The Madison Square Garden Company (NASDAQ:MSG) is a top-notch, multi-faceted, integrated multi-media franchise venture with a unique signature, and can be compared to such dominant names as Disney (NYSE:DIS), and both the Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS), when it comes to delivering world-class entertainment, the most recognized brand names, and creators of one of a kind services for the public at large. All of these businesses are legendary in their own right, and therefore present investors with a unique proposition to share in a rewarding future.

My report will touch on the salient facts that serve as the MSG foundation and pinnacle of the business units, as well as the valuation, but I believe that MSG is fairly valued by the meat and potato numbers alone.

I factor in a 31.5-33.1 % YOY growth rate, in contrast to analysts consensus of 21.8%, in light of the additions to the operating platform, new announcements for 2014, the positive earnings surprises delivered in four consecutive quarters [MRQs], an improved balance sheet with no debt and markedly decreased forward CAPEX investment, the company's return to positive free cash flow during 2013, and the news out on September 4th, that will leverage 2014 projects at the L.A. Forum and the new, off the books, Las Vegas venue. Equally as valuable but not recognized as "monetizeable," are the "intangibles" that are central to my investment perspective.

Valuation by all traditional measures is accurate and fair, both over the past operating history, as well as the current and going forward estimates, but the twelve analysts currently covering the company (all of which rate MSG as either a "buy" or "strong buy") don't or can't factor in the intangible keys that make MSG more than just the metrics of a synchronized growth company.

Wise and prudent investors will need to credit and assign MSG a premium value above the built-in premium, as the profit and larger rewarding potential comes from my views of the real "intangibles." This is why I am estimating the one year upside in MSG share appreciation at $84.50, a 52.5% upside by September 30, 2014, versus analysts target of $62.00; a consensus median $68.80 value, and an $80.00 top target.

Keep in mind these key themes as you review the outlook for the franchise. "Asset and talent curators," "cultivated managerial talent bench," and "multi-faceted franchiser, facility and media coordinators."

These crucial factors needed to manage and grow this collection of business lines are virtually irreplaceable factors, yet MSG has a deep bench with accumulative experience in the hundreds of years between the key personnel, and they also recognize like thoroughbreds when the requisite talent is demonstrated, and consistently and successfully secure these individuals to the team.

I will reemphasize these key aspects while touching on the risks and headwinds, both actual and potential, which could derail or delay the growth that MSG has been demonstrating. Let's start with the company's own business and description, available on the MSG corporate website.

Overview-History, Business Divisions, Venues

"The Madison Square Garden Company is a fully-integrated sports, media and entertainment business. The Company is comprised of three business segments: MSG Sports, MSG Media and MSG Entertainment, which are strategically aligned to work together to drive the Company's overall business, which is built on a foundation of iconic venues and compelling content that the company creates, produces, presents and/or distributes through its programming networks and other media assets. MSG Sports owns and operates the following sports franchises: the New York Knicks (NBA), the New York Rangers (NHL), the New York Liberty (WNBA), and the Connecticut Whale [AHL]. MSG Sports also features the presentation of a wide variety of live sporting events including professional boxing, college basketball, track and field and tennis.
MSG Media is a leader in production and content development for multiple distribution platforms, including content originating from the Company's venues. MSG Media's television networks consist of regional sports networks, MSG Network and MSG+, collectively referred to as MSG Networks; and Fuse, a national television network dedicated to music. MSG Networks also include high-definition channels, MSG HD and MSG+ HD, and Fuse includes its high-definition channel, Fuse HD.

MSG Entertainment is one of the country's leaders in live entertainment.

MSG Entertainment creates, produces and/or presents a variety of live productions, including the Radio City Christmas Spectacular featuring the Radio City Rockettes. MSG Entertainment also presents or hosts other live entertainment events such as concerts, family shows and special events in the Company's diverse collection of venues. These venues consist of Madison Square Garden, Radio City Music Hall, The Theater at Madison Square Garden, the Beacon Theatre, the Chicago Theatre, the Forum in Inglewood, CA, and the Wang Theatre in Boston, MA."

"Asset and talent curators," "multi-faceted franchiser, facility and media coordinators."

A lengthy but apt summary of a conglomeration of world-class franchises and venues that comprise the current MSG. Needless to say, that unique collection needs the comparable talented senior management to have acquired, managed, retained, and expanded such a business. It takes much more control to grow out the value of such a wide bunch of individuals and teams that it would for, say, making sure that Mickey and Goofy are on time and in character every day when the park opens.

MSG started off as part of its former parent company Cablevision (NYSE:CVC), under cable and media pioneer and billionaire Mickey Dolan, who also is on MSG's board of directors. The main members of the senior management were there at the dawn of cable as a medium. MSG was spun off in 2009, and IPO'd in February 2010. As an aside, another equally promising company that I own, and have covered here on Seeking Alpha is AMC Networks (NASDAQ:AMCX){"Breaking Bad," and Making "The Killing" with AMC Networks, Aug 1 2013; AMC Networks: Continued Expansion, Favorable Trends, and Organic Growth, Aug 9, 2013}.

Both of these companies are equally rated strong buys with the analysts, and have provided similar capital gains. Mickey Dolan knows how to pick 'em," his continuing contribution as an "asset and talent curator, cultivated managerial talent, and multi-faceted franchiser, facility and media coordinator." That goes both inside CVC, AMCX, and MSG.


The senior team at MSG is a group seasoned in legal training, media and entertainment backgrounds, facilities and venue experience, and many of the individual members have had a long tenure with the former parent company's divisions. The intangible value of having been a part of the cable sector's pioneering days and under the tutelage of CVC and MSG Chairman Chuck Dolan has been demonstrated with the success and consistent execution in MSG's results, operations and expansion efforts. Much of the venture's success hinges on the continued success of difficult operations, such as media, franchise management, comprehensive negotiations, real estate law, and facilities management.

I initially had many downside questions that loomed as ongoing factors in such a multifaceted and complex collection of assets to manage. First off was my concern regarding the news that the Madison Square Garden's potential jeopardy out ten years, that the NYC laws and the city council could vote to revoke the leasing and operating rights, due to a "property issue" over the structure's sitting in such close proximity to the historic and vital transport hub, Penn Station. Concerns arising from that hit the stock in July, and sent the shares down. There was also the announcement of the company's announcement buying the L.A. Forum in Inglewood, CA.

The expansion and costs of the venture in the highly-regulated California and Los Angeles market, coupled with the historically tough NYC real estate regulations, California's politics, zoning, and regulations, and unions to potentially have to be dealt with, both served to do some due diligence on the implied and likely risks involved in MSG's operations.

MSG's restatement that both the completion of the Garden will be both on time and on budget, as well as the notable reduction of CAPEX for 2014, especially in light of the massive L.A Forum renovation and grand opening project demonstrates management's ability to navigate all of the delicate and potentially costly issues. "Deep management talent bench."

Most Recent Company Performance

MSG reported a record year, with over $1.3B in revenue, a 4% increase YOY, and $355.6M in AOCF, a 26% YOY increase. Net income was totaled at $251.1M, up 46% YOY.

MSG Media Revenue AOCF was $81.8M, up 24%. MSG Entertainment revenue was 34.8, down 34%. The company ended the quarter with ~$278M cash on hand and zero debt currently. MSG returned to free cash flow positive as of YE 2013. Some notable operating highlights were collective bargaining agreements are now secured/ finalized with the NBA and NHL, and long term contracts are in place.

The L. A. Forum (Inglewood, CA) was acquired in June 2013, and the re-opening is anticipated in early CY ("January 15"), 2014." It will have maximum capacity of 17, 500 spectators/ fans, and an additional 8,000 square feet of concession offerings. The Forum also will have outdoor venues and concession offerings. Grand Opening night will feature The Eagles with three nights of concerts.

The Grand Ole' Opry House in Nashville, will perform shows in three new markets-Atlanta, Tampa, and West Palm Beach, as well as MSG's regularly scheduled shows.

College Basketball and additional sports and other events will also make significant contributions in the remainder of Cy 2013 and CY 2014. Interested investor find these details in recent conference call webcast.


MSG has a market capitalization of $4.8B, an outstanding share count of 76.9 million, and earned $1.83 EPS over the past twelve months [TTM]. The company trades with a TTM P/E of 30.5, and is valued with a forward P/E of 21.3. Valuation attributed to the company as per PEG ratio is 1.5x, and a reasonable beta measure of 0.8.

MSG has reported revenue growth of 6.9% over the past 3 years, as opposed to its sector average of 4.9%. Net income growth is the real story regarding the top and bottom lines, and MSG has enjoyed 3 yr. growth of 59.8% versus sector per growth of just 14.9%. MSG's forward growth rate is projected at 21.8% YOY. An ROA has been a historical 5.4%, and ROE has been 10.2%. These returns are below the media and entertainment sector average returns of 7.2 and 16.2%, respectively. These returns will improve for the factors stated in the next paragraph. See the accompanying YChart for MSG's internal valuation metrics.

MSG Debt to Equity Ratio Chart

MSG Debt to Equity Ratio data by YCharts

MSG has also returned to free cash flow positive, from $ -68M as of YE June 2012 to $34M as of YE FY June 2013. Also to its credit, MSG has had four consecutive positive earnings surprises in the most recent 12 months, averaging earnings beats of 47.1%. I keep holding the conviction that analysts, even though attributing a premium factor on MSG as opposed to its peers, maintain an earnings modeling methodology that doesn't do the company justice, another indicator of modeling in "the numbers" only, versus the "intangibles" that I set forth.

MSG Total Return Price data by YCharts

MSG Total Return Price Chart

MSG's net margins [TTM] are quoted by Morningstar as 10.6% vs. its competitors 13.4% collective comparisons.

Sources: Morningstar MSG quotes page, Thompson Reuters Research, YCharts [provided].

Either way, this will be offset and likely lapped due to the new NBA and NHL contract agreements. That ensures an entire season of venue sales, broadcasting, as well as stronger advertising sales. As mentioned, MSG has both raised ticket prices on the "gemstone team franchises," the N.Y. Knicks and the N.Y. Rangers.

The revamped Madison Square Garden will also be a magnet for higher spectator demand, as the additional comfort and luxury on all sections will be a plus in fans' eyes. In addition, the new luxury boxes are a major selling factor. This project's new offerings are done in conjunction with a venture with J.P. Morgan Chase Bank (NYSE:JPM). The same will be true for the L.A. Forum when it opens to the public. Chase will bring in luxury box sales with many of its valued clients. "Multi-faceted franchiser, facility and media coordinators."

Risks and Headwinds in the Business Operations and Performance

There has been a lot of speculation as to the monetization and profitability in MSG on the fame, popularity, and performance of individual star players. Carmelo "Melo" Anthony versus Jeremy Lin and resounding "Linsanity" are two of the controversial stars that many cite. Certainly, the loss of any highly talented athlete would have a negative impact on a team's performance, as well as be detrimental to all related sales that MSG would feel, and could potentially have a material impact. That would be short lived, in any relative terms, and we have all witnessed these types of events prior, just name a team.

That certainly conflicts with other prior analysis on MSG by other SA contributors, who have placed far too much weight on the Knicks franchise alone, in lieu of the collective sum of the parts. Also not included in others' prior analysis are the equally popular and strong annual events centered on college basketball tournaments that the Garden will host in 2014, as well as the N.Y. Rangers' strong, popular franchise.

Even if I am, conversely, underestimating the value of the Knicks to MSG's overall revenue streams and profitability, talent-specific risks are an inherent risk to any sports franchise, and need to be expected and discounted accordingly. This management team has been through this issue many times over, in many teams, and has the skill to offset and overcome any key man gaps. Also, the growing revenue, as well as the locale (i.e. think "NY Yankees' roster") will enable more financial flexibility to replace talent on a forward basis. "Asset and talent curators, cultivated managerial talent bench, and multi-faceted franchiser, facility and media coordinators."

One of the stock's issues lately was the "hit" it took on July 26th, with the issue of the possibility that the New York City Council could possibly close the Garden down in ten years. This was an erroneous conclusion and CEO Hank Ratner addressed, stating that the MSG Group owns the land that the Garden sits on, as well as the air rights over and beyond the building. The issue was cloudy due to part of the land at issue sits adjacent to Penn Station, a major security and transportation infrastructure.

The nature that this concern was addressed was in such a way to have reflected the experience that management has with the (difficult and comprehensive nature of the) NYC City Council, as well as the complex real estate and legal issues, demonstrated managements' experience and ability with such inherently complex issues. The MSG talent bench takes turns at bat, and the team's batting average is good. "Deep managerial talent base."

Tailwinds-Performance Enhancers

MSG's Sports division- the resolution of the sports stoppage in both the NBA and NHL. The Knicks had 6% ticket price increases and over a 97% renewal rate, and have been sold-out for the 3rd consecutive year. The Ranger tickets were increased by 4%, and the team also had over 92% renewal rates, their 6th consecutive year of sold-out seasons. Ticket sales renewal rates results are after the ticket price increases were announced. Average total revenue per home game increased from $1.3M to $1.49M.
Next 2014 Fiscal Year Outlook

MSG plans a roll-out of three new "Hip Hop" media series ventures, seeded via MSG's Free YouTube venue, which boasts 73M unique users and 63M subscribers.

NEW YORK, Sept. 3, 2013 (GLOBE NEWSWIRE) -- Fuse, the national music television network of The Madison Square Garden Company, will launch the brand new original series Big Freedia: Queen of Bounce on Wednesday, October 2 at 11:00 p.m. ET. With local hero and compelling personality Big Freedia as its guide, this new unscripted series explores the underground world of the New Orleans hip hop scene known as "Bounce." Viewers will join Big Freedia as she preps for her first international tour, works through her mother's illness and navigates the extremely competitive world of hip hop.

The docu-series will also welcome fellow artists -- Mr. Ghetto, Sissy Nobby and Katey Red. Big Freedia: Queen of Bounce is set to run for eight episodes and is executive produced and directed by Jeremy Simmons, executive produced by Fenton Bailey, Randy Barbato, and Tom Campbell and produced by World of Wonder (RuPaul's Drag Race, Million Dollar Listing, Life with La Toya).

The above progress, along with the vast asset-talent base in teams and performers' depth, emphasizes my "asset and talent curators" key.

As I did the research for this company report, a new announcement hit the business news,

"The Madison Square Garden Company and Azoff Music Management Join Forces to Create a Powerful, Broad-Based Entertainment Company to Develop Current and Future Opportunities in the Music, Media and Entertainment Businesses" -September 04, 2013-DJNF-

This advantageously levers the launching of the L.A. Forum's future bookings with a strong music franchise partnership with Platinum top-selling popular star artists and bands like the "Eagles, Van Halen, Lindsey Buckingham of Fleetwood Mac, Christina Aguilera and Steely Dan, and other long standing Azoff clients."

The strength of the Azoff is a built-in advantage, and will provide so many expansion opportunities for MSG, as well as being largely incremental to ticket and related sales at all of its traditional venues.

This news hit me with the suddenness of a fortuneteller's thunderbolt precision, and answered another question that was lingering in my uncertainty regarding the business's sustainability. MSG had noted that the company divested 100% of its share holdings in Live Nation (NYSE:LYV) during the quarter. Live Nation went towards the potential of an enhancing partnership in music venues, bookings and ticket sales for premier music artists to add the Garden and future Forum onto upcoming concert tours. As quoted from the same announcement,

"MSG Executive Chairman James Dolan has long recognized Azoff's leadership role in the music and entertainment businesses, dating back to 2008, when MSG was a key investor in Front Line Management Group (then managed by Azoff), and then later during Azoff's tenure with Live Nation Entertainment.

AMM will contribute to the Company its existing artist management business and other businesses that are in development. A subsidiary of MSG will pay AMM $125 million for a 50% interest in the Company and will also agree to provide up to $50 million of revolving credit loans to the Company.

The Company is expected to be a platform for the future growth of MSG, and will commence business with four integrated units, each designed to achieve maximum value for artists and brands in today's evolving business environment and new media platforms."

"Asset and talent curators," "cultivated managerial talent bench," and "multi-faceted franchiser, facility and media coordinators." MSG keeps hitting the ball out of the park. Too bad they don't own the Yankees...yet.

Investment Recommendations

Despite the news regarding a huge deal in the music arena, with a reputable, established, and renowned music legend, the stock sold off on Sep. 5th, closing down 3.52% at $55.97 on 2x normal volume. I jumped in today at $55.86, my initial and first investment, based in large part to this research. The talent and plans for Azoff's and MSG's collective ventures will serve as a major leveraging in a timely fashion, bolstering the promotion of the newly renovated Garden Arena and the L.A. Forum's future out-years.

In addition, interested investors should actually review the management of both of these companies. One review and you'll realize the overlapping and extensive talent base and core competencies embedded, and now expanded, in this top entertainment operator. You will easily understand why I attribute the added "intangible value" premium to MSG.

The Street is crediting a ~28% growth rate to MSG. I think the company is now better positioned by many aspects, to accelerate the YOY growth rate at a 31.5-33.1 % rate. Buy at the current valuation, optimally on market weakness during the slow September historic time period, and on "risk-off" "Taper-fear" days.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue as implied, projected, or assumed. Any investment information contained within these materials are not an intention to advise individuals to invest, sell, promote, market or advertise any company or investment products.

These are the writer's opinions, personal recommendation, are based on individual analysis, and material facts contained within all contained and related content may differ materially, is subject to change, and taken from multiple sources. All investors should do suitable due diligence before making any investment decisions as a result of any facts, information, or opinions in this article. Information in this analysis and report should be used as only a single factor in making their investment decision.

The Contributor-Author is not responsible for any error which may be occasioned at the time of printing of this document or any error, mistake or shortcoming. No liability is accepted whatsoever for any direct, indirect or consequential loss arising from the use of this report. The author expressly disclaims any fiduciary responsibility or liability for any consequences, financial or otherwise arising from any reliance placed on the information in this document. The author does not (1) guarantee the accuracy, timeliness, completeness or correct sequencing of the information, or (2) warrant any results from use of the information. The included information is subject to change without notice.

Disclosure: I am long AMCX, MSG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may add to positions in both AMCX and MSG within the next 72 hours.