Is Madison Square Garden Co (MSG) Really Worth $300? Mario Gabelli Thinks So

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Madison Square Garden Co (NYSE:MSG) was a hot topic among four investment managers most recently. Gamco Investors Rye Chairman and CEO, Mario Gabelli, believes that the shares of the company are worth about $300 per share. His basic thesis was that it has a net cash of $1.5 billion, and the company has also committed to repurchase shares worth $500 million. Its current outstanding shares were 25 million. The question is whether these factors were enough to take the company’s share price to that level. Though 42 large growth funds sold the shares last year, about 108 funds acquired additional shares in the same period. Another point is whether his target price is backed by any valuation. Let’s look at the factors behind the reasons and see where it stands.

Owns Sports Franchisees and Properties

Gabelli said that Madison Square Garden Co (NYSE:MSG) has a number of sports franchises, which are worth about $1.7 billion as a group. Its franchises included New York Liberty women’s basketball team, New York Rangers, and New York Knicks. Aside from that, the company has ownership rights of properties like the Chicago Theatre and the Forum in Los Angeles. It has leased Beacon Theatre in New York, as well as, the Radio City Music Hall. Currently, the stock price is around $151.5 level. That means Gabelli’s projection is nearly double from the current price. While there were factors that help very well, it would be tough to defend the price target with these factors alone.

The other key factor that the investment manager brings in favor of Madison Square Garden Co (NYSE:MSG) was the real-estate play. There is a clamor currently among the investment managers, as well as, the activist investors to monetize the asset value or separate it from the main business to get a real value of the real estate assets. He pointed out the construction renaissance in West 34th Street South and the discussions on renovating Penn Station. Gabelli said that that the air rights of the company that sits on top of Penn Station can be valued about $500 million. According to him, the company is looking to monetize the asset. He believes the combination of all the factors would value the stock anywhere between $200 and $300 per share.

Gap between Asset And Multiple

Guggenheim Partners has different reasons to support that Madison Square Garden Co (NYSE:MSG) stock has the potential to grow a minimum of 25% from the current levels. Aside from the collection of scarce assets, the company is well-placed for sustained value creation for shareholder by leveraging its operating assets and the willingness to trail the option in the live entertainment core competency. However, the center of the investment thesis is the considerable gap between its sum-of-the-parts asset value and comparative multiple valuations on short-term financial parameters.

The expectation appears to be not value recognition from the asset sales. However, the belief is that the market transactions would structure the origin for its sum-of-the-parts valuation. As a result, there would be sustainable opportunities for value creation by such scarce properties. Therefore, some investors, as well as, analysts believe that there was a gap between asset and multiple valuations of Madison Square Garden Co (NYSE:MSG) is concerned. Also,  management has laid out its tactics on operation and investment that is focused on the value of live experiences. Therefore, investors see scope for enhancing incremental investment in lifting the New York Knicks’ lineup, possible big-scale venue investment and medium scale outlays in technology, as well as, content adjacencies. On the operational side, revenue increase from significant TV rights provided opportunities to boost the stock appreciation.

Absence Of Visibility In Particular Investments

However, Madison Square Garden Co (NYSE:MSG) stock appreciation faces the biggest challenge from the current valuation, as well as, the absence of visibility, in particular, areas of possible investments. Aome analysts appear to expect the combination of aspects like the return of capital and the appointment of industry leaders to boost its share appreciation. Guggenheim expects the value to be $235 on the basis of SOTP while it was OIBDA basis suggested a price of $144 with a 12x valuation multiple to 2017 earnings. Based on these two bases, the brokerage has a price objective of $190.

While analysts and investment managers might have several things to back up their arguments, valuation in comparison with sales or cash flow do not support such a high valuation for Madison Square Garden Co (NYSE:MSG) shares. For instance, at the end of December, the company’s price to sales ratio was 3.7% versus the broader index S&P 500’s 1.8%. Similarly, price to cash flow was 38.0% while it was 11.5% for the S&P500. Only one valuation matrix support increased expectations. That is the price to book ratio of 1.5% compared to the S&P 500 index’s 2.7%. The industry’s price earnings ratio was 33.3% compared to 19.0% in respect of the broader index. Similarly, the dividend yield of the industry was only 1.5% while S&P500 offered 2.3%.

Conclusion

If the valuation is taken as a basis for buying the stock, then Madison Square Garden Co (NYSE:MSG) does not merit buying at the current levels. It might have the potential to earn addition revenue, as well as, the profit. But the current price appears to have already taken into it. However, if other expected things like share buyback are taken into consideration, then the shares might have the potential to grow in the upcoming months. But that would be a bet.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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