How Will NBA Lockout Impact Stocks? Conference Calls Provide Insight

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Includes: DIS, MSG, TWX
by: Mike Maher

With a dispute between the NBA owners and players canceling games through at least December 15, it is looking more bleak for basketball fans each day. The dispute over a revenue sharing agreement has seen a quarter of the season cancelled, and with the players filing a class action antitrust lawsuit Tuesday evening, it seems likely that there will be no season til at least next year, if at all.

Aside from the fans, who are the ultimate losers in the situation, it seems prudent to examine how the investment world will be impacted by the lockout. Disney's (NYSE:DIS) ESPN and Time Warner's (NYSE:TWX) TNT will both need to find new programming to air in the vacant time slots, and Madison Square Garden (NASDAQ:MSG) will lose out from Knicks home games, having to find new events to hold in the Garden and air on MSG. So how are these three companies handling the events? Each firm's conference calls provide some insight into how they are operating.

Disney's conference call comments seem almost indifferent about the NBA situation. The company's CFO, James Rasulo, says Disney plans on filling the time slots on ESPN made vacant by cancelled NBA games with other sports ESPN has rights to, specifically naming NCAA basketball as an alternative. He goes on to say that because ESPN draws such a large male demographic, and because that is the audience advertisers buying time during NBA games are trying to reach, Disney is expecting minimal drops in advertising revenue.

It also expects the drop in revenue to be more than offset by not having to pay the fees to the NBA for the rights to the games. Mr. Rasulo goes on to say that he does not expect Disney to suffer financially if the entire season is actually cancelled, again citing the strong demographic trends as a reason advertisers will continue to pay for advertising on ESPN. It seems Disney is prepared to air different sports in the empty NBA time slots, and go on with business as usual.

Time Warner's CFO, John Martin, said that the cancelled NBA games should cut into growth 200-300 basis points in the fourth quarter, and that TWX is planning on there not being any NBA games this quarter. Just as with Disney, Mr. Martin expects the negative impact on advertising to be almost entirely offset by the reduction in payments that would have been made to the NBA. He expects there to be an immaterial change to adjusted operating income due to the cancellation of games. Even without the NBA, Time Warner expects the 4th quarter to be the strongest this year for the Networks group, reiterating the sentiment from Disney that the NBA game cancellations are not going to have a major financial impact.

Madison Square Garden actually owns the Knicks, as well as the MSG network that airs the Knicks games, so the potential for the work stoppage to cut both ways is relatively high. Because of NBA rules about what owners can say, management stated that they can provide no insight into how the work stoppage will affect contractual agreements with customers, partners, or affiliates, and they provide no update on negotiations on the conference call, as was to be expected.

They do say that there is no threat to the liquidity of the company to operate or to continue with the renovations going on at the Garden, which is a plus. The company's plan seems to be to attempt to schedule other events at the Garden to make up for the lost revenue of not having Knicks home games, although in prepared remarks they admit that the short notice in trying to schedule live events is making that difficult. They are also preparing to air both concerts and Knicks-focused series on their networks, in an attempt to help offset the lost revenues of airing Knicks games. They do point out that interest from advertisers related to Rangers games has been higher than anticipated, perhaps a sign that some advertisers are shifting more money towards the hockey team in lieu of the NBA situation. Overall, management provides little insight into the impacts of the NBA work stoppage on the conference call.

So it seems Disney and Time Warner will both make it through the NBA game cancellations unscathed, with the savings on payments to the NBA for programming rights offsetting the majority of the lost revenue from not airing games. As for MSG, a recent analyst estimate says a cancellation of a full NBA season could cut 2012 EBITDA by $100 million, shrinking that estimate from $250 million to $150 million. A potential 40% reduction in EBITDA is huge, even if it would be only for a season, making MSG look like a great short candidate.

However, given the scarcity factor of its sports teams, and the Garden's location in New York City, I'm not sure how low shares will go. Aggressive investors can play MSG on the short side, but beware a resolution to the NBA lockout, while unlikely in the short term, will likely cause the stock to rally.

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