MSGE - Madison Square Garden Entertainment: Should Grow As Guided And Experience Long-Term Secular Tailwinds

2023-10-19 18:49:56 ET

Summary

• I like MSGE because of its expected performance, secular growth prospects, and commitment to returning capital to shareholders.
• MSGE reported strong quarterly results, exceeding revenue expectations and showing resilience.
• The company is expected to experience revenue growth and robust demand trends, particularly in the live entertainment sector, with a long-term tailwind driven by the younger generation valuing experiences.

Overview

My recommendation for Madison Square Garden Entertainment ( MSGE ) is a buy rating, as I expect MSGE to perform as guided in the near term, ride on the strong secular tailwind for the coming decades, and continue to return capital to shareholders.

Business

Madison Square Garden is undoubtedly one of the most recognized arenas that host live events and sports events (basketball, The Home of the New York Knocks, boxing, MMA, etc.). Following a spin-out from Sphere Entertainment , MSGE offers investors a collection of live entertainment venues and productions.

Recent results & updates

Recently, MSGE reported its first quarterly results since the spin-off, with revenue of $148 million and AOI (adjusted operating income) of -$1 million. These results were ahead of expectations on the revenue front while being in line with expectations on the AOI front. The revenue generated in the quarter was primarily influenced by Ticketing & Venue Licensing Fees, which experienced a higher demand for live events across MSGE's portfolio than initially anticipated. Additionally, the revenue from Food Beverage & Merchandise was positively impacted by the ongoing increase in per capita spending. The increase in operating expenses, which was primarily due to inflationary pressures on labor and product input for food and beverage as well as merchandise, counteracted the positive impact of revenue on the overall financial performance. According to the balance sheet, MSGE exhibits a total debt amounting to $900 million, with a corresponding net debt of $820 million. This translates to a net debt to EBITDA ratio of approximately 5+x. In terms of guidance, the management is providing projections for the fiscal year 2024, indicating an expected revenue range of $900 to $930 million, an operating income range of $100 to $110 million, and an adjusted operating income range of $160 to $170 million.

Looking ahead, I anticipate that MSGE will experience growth in accordance with the guidance provided, as demand trends appear to be favorable for MSGE. This is a particularly strong evident point given the management's visibility of bookings. During the most recent earnings call, the management expressed their observation of a sustained and robust demand for bookings. They anticipate that this demand will exhibit growth in the upcoming year at a rate in the low-double-digit percentage range. This guidance is a very strong one as it grows on top of a strong FY23, which experienced a notable increase in bookings due to the rescheduling of concerts as a result of the pandemic. Significantly, there is a lack of indications suggesting a decline in consumer activity. Management's provision of a significant data point that has persuaded me of the likelihood of robust short-term growth is the observation that ticket sales for the Christmas Spectacular have increased by more than 40% in comparison to the corresponding period in the previous year. Compared to FY2023, when there were 181 performances of the Christmas Spectacular, management said they anticipate an increase in sell-through for all 185 performances scheduled for FY2024.

If we look further into the long term, I believe MSGE is also experiencing a secular tailwind. The results of Live Nation (LYV) provide evidence in support of this claim. On LYV's Nov. 22 investor day, they presented a slide that showed the historical long-term growth rate of global concert ticket revenue and expected the growth to continue at a similar pace for the foreseeable future. This aligns with the management statement of MSGE, which anticipates that growth will be propelled by a strong lineup of concerts, the full resumption of family shows and other special events, and the regular season featuring the Knicks and Rangers playing at The Garden. A qualitative observation that I have with the younger generation these days (Gen Z) is that they value experiences and are willing to spend more on things like travel and events to create memories. As Gen Z occupies a larger part of the population mix, this is a demographic tailwind that MSGE gets to benefit from over the coming decades, in my opinion.

In addition to business growth trends, it is noteworthy that the management demonstrates a strong commitment to shareholder interests. Following the spin-off's conclusion, the management has engaged in share repurchases and expressed their ongoing commitment to returning capital to shareholders through stock buybacks, demonstrating a positive outlook. MSGE has approximately 10% of its market cap left to repurchase as of LTM 2Q24, or $160 million. In general, I am of the opinion that MSGE has demonstrated strong performance thus far, and its guidance for FY2024, along with positive remarks regarding the predictability of future bookings and consumer demand across its range of venues, should contribute to the stock's valuation support.

Valuation and risk

According to my model, MSGE is valued at $40.80 in FY24, representing a 20% increase. This target price is based on my growth forecast of 7% in FY24 and FY25, in line with management FY24 guidance and the industry growth of high single digits.

Given its recent spin-off status, using its historical trading range is not meaningful. I believe a more proper comparison is by valuing it against peers in a similar industry, offering entertainment facilities. MSGE is now trading at 13.5x forward EBITDA and within its peer group, MSGE is trading at a premium, which I believe is justified given it is experiencing a strong growth trend that most of them are not, and it has high visibility into bookings.

Risk

MSGE faces a risk of tough year-over-year margin comparisons in 2024. FY2023 benefited from two high-margin, non-recurring events, such as the NCAA regional and the League of Legends World Championship. Additionally, the FY2024 guidance encompasses the impact of MSG Entertainment's new corporate office lease, which is straight-lined over the lease term. From a macro perspective, MSGE growth is still tied to consumer discretionary spending, which is at the mercy of how the US economy plays out in the near term. Worsening inflation and economic growth could impair the near-term growth outlook.

Summary

In summary, MSGE receives a buy rating based on its favorable near-term outlook, strong secular growth prospects, and commitment to returning capital to shareholders. The recent quarterly results, exceeding revenue expectations and in line with AOI projections, indicate the company's resilience. I anticipate revenue growth and robust demand trends, especially in the live entertainment sector. Furthermore, a long-term tailwind is expected, driven by a demographic shift among the younger generation valuing experiences. The management's focus on shareholder interests, share repurchases, and ongoing capital return plans add to the positive outlook.

For further details see: