This sports network company is trading at bargain levels, yet is expected to grow more than 10% this year.
MSG Networks Inc. (MSGN)
From Validea Hot List Newsletter
Strategy: Small-Cap Growth Investor
Based on: Motley Fool
MSG Networks Inc., formerly The Madison Square Garden Company, is engaged in sports production, and content development and distribution. The company owns and operates two regional sports and entertainment networks, MSG Network (MSGN) and MSG+, collectively MSG Networks. Its networks are distributed throughout its territory, which includes all of New York State and significant portions of New Jersey and Connecticut, as well as parts of Pennsylvania. The company delivers live games of the New York Knicks (the Knicks) of the National Basketball Association (NBA); the New York Rangers (the Rangers), New York Islanders (the Islanders), New Jersey Devils (the Devils) and Buffalo Sabres (the Sabres) of the National Hockey League (NHL); the New York Liberty (the Liberty) of the Women’s National Basketball Association; the New York Red Bulls (the Red Bulls) of Major League Soccer (MLS), and the Westchester Knicks of the National Basketball Association Developmental League.
PROFIT MARGIN: PASS: This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. MSGN’s profit margin of 41.86% passes this test.
RELATIVE STRENGTH: PASS: The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. MSGN, with a relative strength of 90, satisfies this test.
CASH FLOW FROM OPERATIONS: PASS: A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. MSGN’s free cash flow of $2.73 per share passes this test.
PROFIT MARGIN CONSISTENCY: PASS: MSGN’s profit margin has been consistent or even increasing over the past three years (Current year: 41.46%, Last year: 24.78%, Two years ago: 1.16%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.
CASH AND CASH EQUIVALENTS: PASS: MSGN’s level of cash $205.3 million passes this criteria. If a company is a cash generator, like MSGN, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.
ACCOUNT RECEIVABLE TO SALES: PASS: This methodology wants to make sure that a company’s accounts receivable do not get significantly out of line with sales. It’s a warning sign if a company’s accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for MSGN was 18.09% last year, while for this year it is 17.62%. Since the AR to sales is decreasing by -0.47% the stock passes this criterion.
LONG TERM DEBT/EQUITY RATIO: PASS: MSGN’s trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don’t need to borrow money in order to grow.
“THE FOOL RATIO” (P/E TO GROWTH): PASS: The “Fool Ratio” is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (MSGN’s is 0.48), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. MSGN passes this test.
The following criteria for MSGN are less important which means you would place less emphasis on them when making your investment decision using this strategy:
AVERAGE SHARES OUTSTANDING: PASS: MSGN has not been significantly increasing the number of shares outstanding within recent years which is a good sign. MSGN currently has 76.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.
DAILY DOLLAR VOLUME: PASS: MSGN passes the Daily Dollar Volume (DDV of $11.6 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. “You’ll be scoring touchdowns against the big guys on your turf.”
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, November 16, 2018