MSGE - Madison Square Garden Entertainment: A Compelling Investment In Dynamic Entertainment

Summary

• Madison Square Garden Entertainment is a leading company in entertainment and hospitality, offering concerts, sports, dining, and nightlife.
• Q2 2023 results showed a 44% increase in Entertainment segment revenue, a 109% increase in operating income, and a 1% decrease in MSG Networks revenue.
• MSGE plans to sell a majority stake in Tao Group Hospitality and spin off its traditional live entertainment business.
• The company has a strong financial position, with a stable balance sheet and a favorable valuation compared to the sector, which I believe makes it a solid buy for investors.

Madison Square Garden Entertainment Corp ( MSGE ) is an influential company in the entertainment and hospitality sectors, providing a wide range of offerings including concerts, sports, dining, and nightlife. With the recent separation of its live entertainment division, MSGE, in my opinion, is putting itself in a solid position for future growth and expansion relative to its competitors.

From my perspective, MSGE has a solid financial position, with a strong balance sheet and a favorable valuation compared to its sector. The Price-to-Book and Price-to-Sales ratios for MSGE are commendable, making it an attractive option for investors who are looking for opportunities in the entertainment and hospitality sector. To maximize MSGE's shareholder value, a decision has been made to explore the possibility of selling the majority of interest in The Tao Group Hospitality.

My opinion is that MSGE is a special and appealing investment opportunity due to its long history and reputation in the entertainment sector. People who are interested in investing in a company that has dominated the live entertainment and hospitality sectors for years while maintaining a favorable financial position should look no further than Madison Square Garden Entertainment Corp.

Financials Demonstrate Growth Across Multiple Fronts

Now that the Q2 2023 financial results of Madison Square Garden Entertainment Corp. have been released, I think it is safe to say the future looks bullish.

I suggest we begin by discussing the Entertainment section of the company, which was the highlight of the past three-month period. In comparison to the same quarter last year, the segment's revenues rose by 44% to $356.5 million . This expansion is a definite sign that the business is succeeding in making more money from the Christmas Spectacular show and from a multitude of concerts. This can also be attributed to increasing sales of food, drinks, and Knicks and Rangers merchandise, as well as revenue from suite license fees.

Additionally encouraging for the corporation is the operating income for the quarter. Operating income was $74.0 million, up $38.6 million or 109% from the same quarter last year, and adjusted operating income was $124.1 million, up $48.0 million or 63%. The improvements are attributed to the increase in revenue, however, there were many expenses that offset some of the gains.

MSG Networks, the broadcasting section of the company, experienced a small drop in income, bringing in $158.9 million, which is 1% less than the amount the year before. However, a greater number of live professional sports telecasts and an increase in per-game advertising sales caused the company's advertising revenue to rise by $6.3 million.

MSG Networks' operating income decreased compared to the previous year, yet remained strong at $24.8 million, a decrease of $10.3 million, or 29%. The recent impact of restructuring costs was primarily at fault for this decline. However, the $39.3 million adjusted operating income was reduced only by $4.5 million, or 10%, from the same quarter last year. This was mostly because of the rise in direct operating expenses and the decline in revenues.

Business Breakdown

One of the most prominent entertainment and sports companies leading the industry is Madison Square Garden Entertainment Corp. The company is divided into two main parts: the Entertainment section and the MSG Networks section.

The Entertainment section of the Company is mainly in charge of creating and performing live events in the Company's locations, such as the Christmas Spectacular show and concerts, in addition to running the areas. This part of the entertainment business makes money from ancillary ticket activities, suite license fees, other event-related activities, and sales of food, beverage, and merchandise. The company runs many famous venues, such as Madison Square Garden in New York, Hulu Theater within Madison Square Garden, Radio City Music Hall, Beacon Theatre, and the Chicago Theatre.

The MSG Networks part of the business runs regional sports and entertainment networks, such as MSG Network and MSG+, which are committed to providing live professional sports and other activities, as well as a wide range of sports-related original shows, news, and analysis to viewers in the New York area. Revenue, for this segment, comes from affiliation fees, advertising, and other sources.

Potential Sale of Tao Group

MSG Entertainment recently stated that they may sell the majority of their shares in Tao Group Hospitality. In my view, this could be a major development for both the entertainment and restaurant industries.

Since MSG Entertainment purchased Tao Group Hospitality in 2017, it has gone through a large change and has become a worldwide leader in food, amusement, and nightlife. With more than 70 locations under different names across 20 countries on four continents, it's easy to see why Tao Group Hospitality has been so successful.

I believe it's in the best interest and wise of MSG Entertainment to potentially sell its primary stake in Tao Group Hospitality. The entertainment and dining businesses worldwide are experiencing continued growth, which means there is a lot of opportunity for someone to purchase Tao Group Hospitality and develop and expand it further. This could result in greater profits for MSG Entertainment and its stock owners. MSG Entertainment is currently exploring this option which is an optimistic outlook for both the company and its shareholders.

Proposed Spin-Off of Entertainment Business

The announcement that Madison Square Garden Entertainment Corp. seeks to spin off its traditional live entertainment company is a brave move. In my opinion, this decision was very timely as it will help the company concentrate on its fundamental business.

I believe the projected 67% interest MSGE shareholders will retain in the live entertainment industry by this new organization is a sign of their progressive outlook and strategic management. The organization will be able to guide its strategic direction and investigate growth opportunities in the entertainment industry. The company has submitted a statement to the SEC that it plans to complete the spin-off by the end of March 2023.

Risks

In the last few years, the COVID-19 pandemic has significantly harmed the live entertainment sector, leading to widespread event cancellations and a drop in audience attendance. However, MSGE has been able to weather this storm thanks to its strong cash position, balance sheet, and financial standing.

Another difficulty facing the market for live entertainment venues is the emergence of alternate types of entertainment like streaming services and video games. New ways of staying entertained have gained momentum over the last decade, meaning fewer people are interested in attending concerts, movies, etc. live. However, MSGE's wide portfolio of venues in New York and Chicago gives the business some risk diversification, which helps it be better able to respond to shifts in consumer demand.

Intense competition is also present in the market for live entertainment venues from sporting events, concert venues, and other live entertainment options. MSGE's upcoming spin-off of its traditional live entertainment business will help the company to focus more on its core business and increase its competitiveness in the market. This new venture demonstrates the company's dedication to increasing shareholder value and making its operations more efficient.

Competitors in the Entertainment Sector

Compared to its rival, Live Nation Entertainment ( LYV ), Madison Square Garden Entertainment Corp. distinguishes itself as a pioneer in the live entertainment sector. The renowned Madison Square Garden, Radio City Music Hall, and The Chicago Theatre are just a few of the historic venues, well-known brands, and broad portfolios of intellectual property that MSGE has over Live Nation.

MSGE has a strong financial base, a strong balance sheet, good stability, and the ability to invest and grow, even during uncertain times. Its dedication to innovation and technology is another factor that truly sets MSGE apart from its competitors. For example, its commitment to creating its MSG Sphere technology makes it a technological leader in the live performance sector.

Valuation

There are a few critical financial criteria that I usually take into account when assessing a company's value. One of these measures is the Price/Book (P/B) ratio, which compares the market capitalization and book value of the company. Currently, MSGE's Price/Book ratio for the last twelve months is 1.00 , while the expected Price/Book ratio for the future is 0.92. I think the market is skeptical about MSGE's future which is evident by the company currently trading at a discount.

When looking at the whole picture, the P/B ratio is not the only important metric to evaluate. The Price/Sales (P/S) ratio, which contrasts the company's price with its revenue, is another crucial valuation statistic. The price-to-sales ratio ((TTM)) for MSGE is 1.02, while the price-to-sales ratio ((FWD)) is 1.01. The fact that MSGE is trading somewhat above its sales implies that the market has a more favorable perception of the company's potential for future growth, however, it is still undervalued compared to the sector median.

So how does MSGE's performance stack up against that of the larger industry? The Price/Book ratio for the sector based on current data is 1.92, and the Price/Book ratio for future data is 2.19. The average Price/Sales ((TTM)) ratio for the sector is also 1.35, while the Price/Sales ((FWD)) ratio is 1.32. This indicates that the market considers the sector more likely to overvalue companies in the future and likewise, MSGE is more likely to continue to be undervalued.

MSGE’s main competitor, Live Nation's P/S ((TTM)) ratio is 1.17 and its P/S ((FWD)) ratio is 1.12. Live Nation is slightly overvalued in the eyes of the market compared to MSGE in terms of its trailing twelve months ((TTM)) P/S ratio. A higher P/S ratio means that the market is valuing each dollar of Live Nation's revenue at a higher price, which I believe indicates that the market is expecting slower growth in the future.

In contrast, MSGE's lower P/S ratio suggests that the market is valuing each dollar of MSGE's revenue at a lower price, which indicates that investors are expecting stronger growth in the future. However, it is important to note that the forward-looking P/S ratio is much closer between MSGE and Live Nation, which is an indication that the market has a more similar outlook for the future growth prospects of both companies.

Final Thoughts

In my view, MSGE is a solid buy for those who want to get exposure to the thrilling live performance industry. The company stands out from the competitors and has a significant advantage thanks to its strong position in the sector and renowned locations like The Garden and Radio City Music Hall.

Additionally, I think MSGE's recent actions show a dedication to maximizing shareholder value. The company's decision to separate its live entertainment division and consider selling its majority stake in Tao Group Hospitality indicates that it is taking thoughtful steps to achieve success. I have no doubt that the company with a solid balance sheet and a talented management team is poised for continued growth and success. Furthermore, the live entertainment industry has a promising future ahead of it and will only continue to grow.

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