MSGS - Madison Square Garden Sports For The Win

2023-08-15 14:19:33 ET

Summary

• Madison Square Garden Sports owns the New York Knicks, New York Rangers, 2 minor league teams, a 114,000-foot complex, and eSports assets.
• Sports franchises have been lucrative investments, with teams often selling for much higher than their estimated value.
• The assets could be selling for 50%+ of intrinsic value.

Jaylon Brown just signed a 5 year $304 million dollar contract with the Boston Celtics, the richest in NBA history. I repeat, richest contract in NBA history. Not Michael Jordan, Lebron James, Kevin Durant, or Luka Doncic, it's Jaylon Brown, somebody a casual fan may have never heard of as he isn't even the best player on his team . If you aren't a 6'6 hooper, the next best thing you could do to get a piece of the pie is own an NBA team. You can own a tiny piece of the New York Knicks for $208 dollars via Madison Square Garden Sports ( MSGS ). Currently, MSGS is a small piece of my portfolio but I'm looking to add more.

What is Madison Square Garden Sports?

Here are the assets.

New York Knickerbockers "Knicks" NBA Team . An original NBA team with a large fan base. 8 Finals appearances and two championships. They play in Madison Square Garden, "The World's Most Famous Arena". The Knicks don't own Madison Square Garden but have a contract to play there through 2055.

New York Rangers NHL Team . An "Original Six" NHL Franchise has played 96 seasons and won 4 Stanley Cup championships. They currently have the 7th best chance to win the Stanley Cup via NHL futures.

The Company's "other professional franchises include two development league teams - the Hartford Wolf Pack of the American Hockey League ("AHL") and the Westchester Knicks of the NBA G League ("NBAGL")".

In addition, the Company owns Knicks Gaming , an esports franchise that competes in the NBA 2K League, as well as a controlling interest in Counter Logic Gaming ("CLG"),

Madison Square Garden Training Center in Greenburgh, NY. The approximately 114,000 square-foot facility features two basketball courts and one NHL regulation-sized hockey rink and is equipped with well-appointed private areas and office space, and exercise and training rooms with dedicated equipment for each team as well as the latest technology and other first-class amenities.

The Company operates the CLG Performance Center in Los Angeles , CA, which includes unique competition spaces tailored to the Company's esports game franchises, as well as a studio and editing bay for video productions and outdoor areas that can be used to hold fan events.

In October 2015, the Knicks and the Rangers entered into 20-year local media rights agreements with MSG Networks, creating a significant recurring and growing revenue stream for the Company

Interestingly, these tremendous assets were run by only 467 full-time union and non-union employees and 425 part-time union and non-union employees.

Why own it?

The reason not to own the sports franchises is profit and loss, $935 million in revenue, $228 million in operating cash flow, 60 PE. You can't plug the financials into excel, model it out, and have it make sense. If you were looking for a commuter car to non-frivolously go to work you buy a Honda, the Porsche just doesn't make financial sense. The reason to own is because there are only 30 NBA teams and only 32 NHL teams. I believe you own a team for fame, prestige, and credibility to show you made it and become part of a super exclusive club of billionaires.

Sports franchises have been tremendous investments over the last few decades that have grown exponentially in value, often much faster than inflation and the S&P 500. The Golden State Warriors are worth 61 times their 1996 value and 16x the $450 million sale price in 2010. In 1999 Dan Snyder purchased the Washington Redskins for $800 million while the stock market was blowing bubbles, he ran the once proud franchise into the ground in my opinion but recently sold the team for $6.05 billion dollars, 8.8% annualized over 24 years which beat the market. Even one of the worst and least liked owners in sports, who turned a good team bad still beat the market. You want to own assets that even a fool can run because eventually probably will.

The Milwaukee Bucks were purchased for $18 million in 1985, sold for $550 million in 2014 and are now worth 2.34 billion per Sportico. 12900% return, 13.67% annualized over 38 years.

The Phoenix Suns were estimated at $1.92 billion at the end of 2021, they were sold for $4 billion in 2023. They were purchased for $401 million in 2004, 898% return, and 12.87% annualized for 19 years.

In 1920 the McCaskey family purchased the Chicago Bears for $100! The Bears currently have an estimated worth of $6 billion, so that's a 5,999,999,900 percent return over 103 years or 18.99% annualized.

Catalysts

Airing sports games on TV has increased revenue and helped valuations explode. Look at the NFL, they don't even need fans to attend games as they have a $10.27 billion dollar TV contract or $321 million per team. In an era of so many entertainment choices, DVR, where can you get so much concentrated attention for advertisements at once? The NBA/NHL don't make as much but the point stands where the teams make more than just ticket prices and hotdogs like the old days.

The future might be even brighter for teams with the Metaverse, and technology like the Apple (AAPL) Vision Pro. Going to an NBA game and sitting in the nose bleeds is one thing compared to sitting courtside and seeing 7-foot giants run up and down the court. Not everybody can afford thousands of dollars for front-row seats or has a desire to fight the crowds and go to games. What if instead of simply watching the game on TV you get a better/closer experience with Virtual or even Augmented reality for $50, $100, $25? Multiply that times thousands and that's a tremendous revenue stream. As much as TV boosted the game and skyrocketed values, exciting new technology can give us a second wave.

Online gambling is also being allowed/relaxed in many states. Having partnerships with sports books adds to the experience for a lot of folks. Imagine sitting in your seat (or even at home) live in-game betting on your team or different player props. Do you think that's going to add more eyeballs to the game or detract? This will amplify the thrill of victory and the agony of defeat.

Expansion possibilities. Whenever I'm in Europe, Europeans tell me they want to go to New York, or they've been to New York. They've seen it on countless TV shows and movies and they dream of seeing the big city in person. I can't tell you how many NY Yankees hats you'll see in Tokyo as a fashion statement. A lot of those same people tell me they'd love to see an NBA game in person. The NFL doesn't get as much buzz because it's not as much of a global game as the NBA or even MLB. You can't tell me that London, Paris, Munich, and Barcelona can't support NBA teams. When even the NFL has a game or two in London it's a hot ticket. Faster commercial fights , could one day see the NBA opening a 4+ team European division that will only expand global popularity. They are talking about 3.5-hour flights from NY to London within 5 years, Mach 1.7 (1,300 mph), and maybe even 80 minutes possible after that. All things equal, where would you rather have an NBA franchise, in London or Memphis?

Risks

Covid took the fans out of the stadiums but what if it was taken a step further and players weren't allowed to play? The 2020 NBA season was played in a bubble near Orlando Florida but what if it didn't happen at all? If people weren't allowed to go to church, work, and kids couldn't go to school, it's not impossible to imagine the union/NBA not having games.

Boycotts. Professional sports leagues have already gotten political which turned many fans off, what if they got even more political?

A deep recession will reduce demand to attend games as well as the price a potential owner would pay for the team.

The NBA players are unionized. They have a collective bargaining agreement through the 2029-2030 NBA season. If a new agreement can't be made there's risk of a lockout.

MSGS is geographically tied to New York City, a city that's had a surge in crime and many residents chose to move out due to high rents and flexible work-from-home arrangements. If the city declines further that could be a negative for these two entertainment options. The TV deal largely insulates the team's revenue but you obviously want to sell out games. The Knicks made the playoffs last year and did not sell out all their games, they averaged 19,392 per game or 97.7% capacity . Only two teams sold out all their games (Warriors/Mavericks).

Valuation

Knicks $6.58 billion (Second most valuable team in the NBA).

Rangers $2.01 billion (Second most valuable team in the NHL).

That alone is 8.59 billion and doesn't factor in 2 minor league teams, the eSports team (a growing sport), the 114,000 square foot training complex, and a controlling interest in the eSports league (Counter Logic Gaming).

Keep in mind the market cap of the stock is $4.97 billion as I write this.

Sportico and Forbes post valuations. My point is that these teams frequently sell above these estimations as teams aren't often for sale and they can often turn into bidding wars among people with large wallets and even larger egos. This has led to teams often selling for much higher than estimated value. For example, in 2014 Steve Ballmer bought the LA Clippers for $2 billion when the estimated value was $575 million. Last year the Denver Broncos were estimated by Forbes to be worth $3.75 billion and were sold for $4.65 Billion to the Walton Family. This happens all the time and I believe will continue to happen as the TV contracts grow and players and owners will make more. Do you really think players will make less in the future? Of course, they will make more. What other live TV gets more viewers? There will be even additional opportunities to monetize with social media, virtual reality, augmented reality, and increased global wealth. I think Billionaires think about sports ownership differently. The Billionaire buys the sports team in much the same way Joe the Plumber buys a Corvette in my opinion. It's about luxury, status, and opulence.

Markets are driven by supply and demand. Steve Ballmer bought the Clippers in 2014 and missed out on some teams prior, he's from Michigan and reportedly wanted to buy the Pistons as early as 2006. Mat Ishbia who bought the Phoenix Suns has been in the market for NBA/NFL teams. It goes to the point that there are only so many teams and the demand outstrips the supply. If you are a billionaire that missed out on that team you wanted to buy, what do you think is going to happen the next time a team is for sale? Much the same way perspective homeowners were bidding over the asking price, these Billionaires do too. While many frugally-minded people might brag what a deal they got on a car, a stock, a home, some people flex when they buy over asking price, over value, to outbid fellow billionaires to get what they want.

Personally, I believe if the Knicks/Rangers sold on the open market they'd exceed the posted valuations. I don't think they'd sell for double or triple the price like some of the other organizations but I do believe they'd command at least $10 billion, perhaps $12 billion, maybe as high as $15 billion given they are already ranked the 2nd highest value in their leagues. I'd consider the eSports and the rest as a call option on the future. Gaming is huge and growing faster than the market, you now have 138 gamers that earn over $1 million per year with the top gamer earning $7 million per year. Gaming is bigger than the movie industry and bigger that the sports industry and it's nice to be a part of that entertainment also.

Don't forget the $8.59 billion, $10 billion+ valuation is a snapshot in time, it's important to consider these valuations will probably continue to grow and potentially beat inflation/the market. So this asset is currently trading at a 50%+ discount to intrinsic value in a market where "value" can be tough to find.

Exit Strategy

Given you can't really value this asset on operations, exit strategy becomes important. How can you actually realize the intrinsic value? The Dolan family controls approximately 70.7% of the total voting power. Dolan did very well selling Cablevision for a 22% premium in 2015. He sold for over 8x cash flow where as other cable companies were trading around 6x, he got a good price. The exit would involve Dolan selling part or all of the team.

In 2019 the NBA/NHL/MLB allowed Private Equity and Sovereign Wealth funds buy passive stakes in teams. Under current rules, the controlling owner has to own at least 15% of the team, and sovereign wealth can own no more than 5%. That still increases the demand for franchises as they are often purchased by a consortium. We are talking about billions of dollars, liquid, and many billionaires own businesses and stocks which might not be liquid and could have large capital gains consequences and other complex tax considerations. From my understanding the NFL doesn't even necessarily sell the team to the highest bidder, there's a process and other factors besides just money are factored into who wins the bid. The fact that private equity and sovereign wealth can chip in only adds more dollars to a potential auction.

Price

I'm long a small position at ~$190, looking to add to my position and average in over time. If you can't find value in the market why not buy something at 47%, 50% or more of intrinsic value while you wait? The company reports on Thursday, August 17th results through June 30th. This is a long-term investment for me and I'm not super concerned with price fluctuations regarding earnings. Last year the price did fall as low as $136 and if it happened once it could happen again. At the same time, the intrinsic value could be $400 to even $600 per share in the event of selling the Knicks/Rangers. If the stock ever retreated to $150 again I'm not saying I'd go all in but I'd go in big time. I do plan on adding to my position before Thursday at current prices. If you want to see what else I own you can see the rest of my 65 stock portfolio which I wrote about a couple of months ago.

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