Barron’s Is Pro MSG

Madison Square Garden (MSG) is currently in the process of breaking itself up again, this time into a sports team business (ex. Knicks and Rangers) and a venue/concerts business. Naturally, this has led to more people taking a look at the name and the upcoming catalyst has Barron’s thinking the company offers a lot of upside.

The company’s assets include venues and sports teams including the Knicks and Rangers which Forbes recently valued at $3.6b and $1.6b respectively. The company consistently trades at a discount to its perceived asset value, but some discount is likely warranted given the illiquid nature of its holdings. Shortly after the spinoff announcement MSG shares jumped up to ~$330, but have since given most of it back, although it has been climbing recently.

Many are bullish on the company. Imperial Capital’s David Miller has a $383 sum of the parts valuation for MSG. Evercore analyst David Joyce has a $360 price target on the company so there is a lot of upside, even at today’s ~$290 price. According to Mr. Joyce, MSG has ‘unique, trophy entertainment and hospitality assets that accrete tax-efficiently, with an upcoming catalyst that is no longer apparently recognized in the shares’ and the company is ‘largely sheltered from macroeconomic headline risk, advertising cyclicality, and cord-cutting risk endemic to much of the rest of our coverage universe.’

Boyar Research is also positive on the name. Boyar thinks management has a good track record of building/renovating arenas, has strong confidence from large shareholders (Silver Lake recently increased its ownership) and that Mr. Dolan is highly motivated by the recent grant of $40m of restricted stock and options at above market prices. Boyar also thinks Forbes values significantly undervalue the teams and recent team sales has certainly proved this to be true. The Clippers were sold for $2b in 2014 and no one saw that coming!

The piece also notes the unrealistic hope that a spinoff will help facilitate a sale of the sports teams. Mr. Dolan recently excited all of NY when he told ESPN that he would be open to a sale of the team. He also mentioned the number $5b for the Knicks alone! The company shortly quashed the rumor and was recently forced to do so again after Bill Simmons started another sales rumor. Given the family’s love of the teams and its controlling voting stake, it’s really hard to bet on a sale. It would be a doozy though.

One other positive for the sports team complex is the recent legalization of sports gambling in the US. Mario Gabelli included this as a reason he is long Liberty Braves (BATRA).

One concern highlighted by Barron’s is that there is some uncertainty surrounding the MSG Sphere projects. These are brand new concert venues set to be built in Vegas and London and there is some skittishness and pessimism surrounding these endeavors. Part of that stems from the fact that MSG ‘hasn’t disclosed any financials on the Sphere projects, including projected costs and return objectives’. It probably hasn’t helped that the opening timing for the Vegas venue was recently pushed back a bit further into 2021.

During its recent earnings call, President Andrew Lustgarten also pushed back the timing a bit and the company is ‘now working to complete the transaction during the second half of the calendar year.’ We have updated our table and will keep you updated as more information is released.

Disclosure: Author holds no position in any stock mentioned.