In the case of this company, the sum of its parts is really worth much more than its valuation.
Madison Square Garden (MSG)
from Ian Wyatt’s Million Dollar Portfolio (Name changed from $100k Portfolio)
Madison Square Garden (MSG) is home of the Knicks, the New York Rangers NHL team, the Big East basketball tournament, and a host of concerts every year.
Forbes estimates that the Knicks are the most valuable team in basketball. In its list of valuations—published in January before the Ballmer acquisition of the Clippers—the Knicks were estimated to be worth $1.4 billion. That valuation equaled nearly 15x the team’s operating income of $96.3 million last year. That compares to the lofty valuation of 133x operating income that Ballmer is paying for the Clippers (based on estimated operating income of just $15 million last year).
Forbes estimates that the value of the New York Rangers is $850 million, making it the second-most valuable NHL team, behind the Toronto Maple Leafs.
If the combined value of the Knicks and Rangers is more than $4 billion, which translates to 85% of the total current valuation for Madison Square Garden. For investors, these two assets are a big reason to be attracted to the stock. But the other assets owned by the company are also quite valuable, and overlooked.
Madison Square Garden owns the arena. However, it leases the land from New York City, currently on a 10-year lease. That means that the company could be forced to find a new home. But there is considerable value in The Garden. The right to operate a major arena in New York City is a huge asset, conservatively estimated at $1.5 billion.
Another of the company’s overlooked assets is MSG Networks, the media arm of Madison Square Garden that broadcasts Knicks and Rangers games on cable, satellite, and radio in the Mid-Atlantic region. In fiscal 2013, MSG Networks generated $678 million in revenues, accounting for half the company’s total revenue. And MSG Networks generated cash flow of $350 million. Based on that performance, MSG Networks is likely worth 10x cash flow, or $3.5 billion.
Finally, it’s worth noting that the company also operates Radio City Music Hall and the Beacon Theatre, which generated $252 million in sales in 2013. A conservative valuation of 1x sales pegs a value of $250 million on the Radio City/Beacon Theatre aspect of the business.
Madison Square Garden is pricey when you consider conventional valuation metrics, trading at 38x fiscal 2014 EPS estimates of $1.62. That’s expensive for a company that expects EPS to decline this year.
However, now that the company is done with renovations at The Garden, earnings and cash flow should get a nice boost. Next year, EPS are expected to soar 28% and free cash flow could be $300 million.
But based on a price-to-earnings or price-to-cash-flow ratio, the stock is richly priced. Instead, it’s worth considering the value of the assets.
Based on my analysis, Madison Square Garden is currently valued at nearly $118 per share. That’s nearly a 100% premium to the recent share price of $60.
Madison Square Garden offers investors an outstanding opportunity to buy a group of world-class sports assets at 50 cents on the dollar. Given the current value of the assets, MSG shares are worth $118. And there appears to be upside to that value if the heated M&A activity in sports teams continues.
Ian Wyatt, Ian Wyatt’s Million Dollar Portfolio, www.100kportfolio.com, August 1, 2014