"The excitement that a gambler feels when making a bet is equal to the amount he might win times the probability of winning it…." Blaise Pascal 1623-1662
The quote above is the product of two geniuses in the process of solving a question for a gambler friend in the 17th century. Genius one, Pierre de Fermat, asked Genius two, Blaise Pascal, to assist him in measuring the relationship between odds, excitement and probability of winning.
Now, over three hundred years later, the business of legal gambling and odds making has rapidly moved into an enormous expansion of sports betting in the US at a faster pace than anyone has anticipated. The same inherent psychology that drove the great mathematicians to conclude that probability and psychology blended to produce the mindset of the gambler applies today. Odds making on sports outcomes springs directly from that historical construct.
The excitement implied by great brains mooting the odds of probability has apparently not flagged in nearly 350 years.
Fast forward to mid-2019.
At this writing, most of our industry colleagues agree that we could see up to 20 US states go legal in sports betting within the next five years. The prior estimate was 14, but legislation is moving apace since the US Supreme Court decision striking down PASPA last May.
The United Center a template for MSG?
(Above: The privately held United Center in Chicago could be the template for MSG in New York as pending law is similar to Illinois statute just passed: Source: UC)
Most recently, Illinois passed the most comprehensive gaming bill in its history which included the first ever authorization for sports venues and arenas to conduct sports betting. This puts venues like Wrigley Field, Soldier Field, Guaranteed Rate Field, and most intriguing of all, the privately held United Center in the pole position to build sports betting revenues from its household teams: The NBA Chicago Bulls and NHL Chicago Blackhawks.
The 27,000 seat, United Center, the largest in the country, also hosts A-list concerts. Its 200 annual events to an audience of 3m in a flagship market like Chicago echo directly into the paradigm of the State of New York. Its latest sports betting bill follows the Illinois model of expanding sports book venues to sports arenas.
The United Center and the other Illinois sports stadiums are currently engaged in active explorations of partnership deals with sports betting operators.
The breakthrough legislation in Illinois sheds immediate light on the state of New York's bill in general, but specifically warrants our attention to the shares of Madison Square Garden Company (NYSE:MSG).
That arena, an iconic center of sports like the United Center, likewise houses two pro sports teams: The NBA New York Knicks and the NHL, New York Rangers. And, both arenas host A-list concert acts and one-off events.
On a typical weekday, there are over 4 million people in Manhattan, divided among residents, working people, and tourists.
Madison Square Garden sits in midtown Manhattan and would literally have no competition under the pending New York bill, which currently omits sports betting in stadiums in counties where existing gaming operations such as casinos or tracks already operate. In Manhattan, there is no such animal. MSG would have the business in that borough all to itself.
The lingering concern in New York is mobile betting, which continues to hold up a final signature by the governor due to his questioning as to its constitutionality. Otherwise, the bill allowing stadiums to install sports books is in place. Our sources tell us that the governor has until December 31st of this year to resolve the mobile issue. "He probably will. We have little doubt the bill as passed, will be signed and the mobile issue resolved," said one individual involved in the legislative mix since the beginning.
Madison Square Garden Company: Stock is a bit lower, but prospects way up - A contrarian view to the trade
A recent Morgan Stanley study picked New York State joining the elite coterie of Illinois, Ohio, Massachusetts and Michigan as which jurisdictions it believes will become the biggest revenue producers in the nation. It has run numbers for New York and foresees an average spend per player of around $47.50 translating to around $810m annually at full spread. Currently, it is widely believed that a significant chunk of New Jersey's sports betting revenue YTD has drifted across bridges and tunnels from New York bettors.
New Jersey has produced YTD2019 $82M in sports betting revenue from 11 multiple skins operators (platforms). Of this over $42m or slightly above half has come from the Meadowlands Racetrack book which sits a 33-minute ride just across the Hudson River from Manhattan. Historically, the track has drawn significant wagering business from points in New York. So, the imminent legalization in New York state and the possible entry of Madison Square Garden into sports betting should perk up investor interest in the stock.
Sitting minutes away geographically from the Meadowlands, a Manhattan sports book foresees a possible major drainage of New Jersey revenue in the cards. And, by the gift of geography, it's a huge upside for a sports book located in the legendary MSG arena. While it is early days, we see this as part of a bull case for the stock not really baked in by current forward earnings estimates alone.
Meanwhile, this development, plus others at MSG, warrants putting their stock on a watch list right now
MSG has edged down a bit over the last month despite the developments in Illinois that foretell a possible sports betting mecca arriving at Madison Square Garden going forward.
Price at writing: $281.43
Price June 11: $285.85
52 week range: $240.33 - $285.24
Market cap: $6.723bn
Beta (3 yr monthly) 0.49
P/E (ttm) 173.44
EPS (ttm): $1.62
1 year target: $363.34
Enterprise value as of 1Q19: $5.481bm
MSG is thinly traded, with an average volume of 142,000 shares per day. Yet in our view, investors are missing what could be a big story in the stock going forward related to the sports betting potential of the Garden as the site of a brick and mortar sports book just as the United Center is in Chicago.
Recent sentiment on the stock over the last month reflects some analysts negative earnings outlook for the current quarter. Net earnings estimates are trending lower to the $1.40 to $1.26 range this month. Shares are down 9.2% this month. Yet analysts' forecasts of profit next year run an estimated 28% ahead, lower than the average five-year earnings growth of 56% ttm. Net income is forecasted to rise from $142m to $181m by 2020.
Ironically, the company has been in the headlines this month, not on the financial page but the sports section. A series of disappointing possibilities for the NBA New York Knicks to pluck off the two major free agent players it had hoped to lure to the iconic arena dominated company news. Unfortunately, this has muddied the waters on what we believe to be a far more positive story on the stock related to its potential future in sports betting. The fact is that the failure to land the vaunted free agent players will have little impact on the Garden's unique ability to fill every seat in every Knick as well as NHL Ranger game. Its location is pure gold for sports and will get more golden with the advent of sports betting over the next three years.
Morgan's estimate of sports betting revenue once New York state gets up and running at $810m may be a bit low, according to our colleagues in the sports betting space. One marketing executive who has supervised sports betting at a casino over many decades put it this way,
"Once the smoke clears on the mobile part of the law before the end of the year, we'll have a better idea of the total New York State can generate. My guess is that it will be closer to $1bn by 2022. And of that, sitting alone in Manhattan as the only place to make a lay down on a game, you are looking at very serious potential money flowing into the MSG coffers."
We modelled the New Jersey Meadowlands track's $42m sports betting revenue YTD19 against a possible major sports book operation at the Garden, and given the density of population both day and night parts, plus attendance at Knicks, Ranger games and concerts, we arrived at a potential of $100m in revenue as a floor for MSG. "It could go higher," our source said, "If the regulations allow in-game betting options".
Our view is that there is a vast potential of MSG becoming a major sports betting venue in New York State, in general, and the possibility that it could become the only legal sports betting option on the island of Manhattan. Assuming the already passed law gets the governor's signature before year's end, MSG stock has a considerable built-in upside that has not as yet been baked in by the market.
Add to that prospect the 18,000 seat Sphere project, a massive glowing orb of an arena that MSG is building in partnership with Las Vegas Sands (NYSE:LVS) that is due to open in 2020, and you have a rationale for being in the stock now. Sports betting shares will accrue the kind of magic we believe will attract much wider retail ownership among investors than it may have at the moment. Underlying the present MSG asset base is a sports and entertainment business that continues to produce.
(Above: The Sphere: AN MSG/LVS partnership lighted orb arena coming to Las Vegas in 2020 according to latest timeline: Source LVS)
While investors tend to shy off thinly traded stocks for any number of good reasons, there are, in our view, exceptions where unique circumstances enter the trade and begin to attract much broader followings. MSG may just be on the brink of that possibility with sports betting looming in New York and worth a look right now.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.