If you haven’t heard by now, Madison Square Garden (MSG) is an interesting value play. The thesis is simple. It’s a sum of the parts (SOTP) play on some valuable assets.
The idea is well covered in the value investing space and I’ve curated some of the best resources for us to dive deeper.
Why am I doing this now? Let’s go to the charts …
Some of you are spraying holy water right now.
“Using technical analysis with value investing!? Heresy… I say!”
I get it.
Here’s what I know. MSG’s stock is close to breaking out of a six-month consolidation. This isn’t to say the stock won’t head lower, go up, or go up and then head lower. All I’m doing is showing a period of consolidation that’s currently showing signs of breaking.
We also “know” that the company’s trading for a significant discount to its collective asset values.
So, for those that are interested in the idea, here’s a list of my favorite resources:
Resource #1: Richard Howe of Stock Spin-Off Investing
Richard Howe runs stockspinoffinvesting.com. He conducts killer research and his website is the first place I go for new spin-off ideas. You can find his MSG write-up here. Here are my favorite sections:
“The primary reason MSG trades at a discount to its private market value is because the company is controlled by the Dolan family (over 70% of voting stock and over 20% of common equity). And investors generally don’t believe that the Dolan family wants to sell the Knicks or Rangers, thus, the true valuation of the franchises will be hidden for the foreseeable future.
However, the structure of the spin-off may solve this problem.
The remainco (the entertainment company) plans to retain a ⅓ interest in the spin-off (sports company). Why? Because it needs to finance the construction of the “Sphere” venues in Las Vegas and London which will cost more than the $1BN of cash that it has on hand. It will have the ability to sell a portion of the sports company.”
Here’s Richard’s back-of-the-envelope valuation:
Richard and I also chatted MSG on the Value Hive Podcast. You can listen to that episode here.
Resource #2: Barron’s Article, Andrew Bary
Barron’s released a great article back in 2016 summarizing the MSG thesis. You can read that here. Here’s my favorite section from the article:
“MSG has a strong balance sheet with nearly $1.5 billion, or about $60 per share, of cash, and no debt, reflecting a payment from MSG Networks at the time of the spinoff. The company has earmarked $525 million for share repurchases. So far, it has bought back $78 million of stock at an average cost of $151 a share—a pace that has disappointed some investors. The company pays no dividend.
MSG is asset-rich but doesn’t generate much annual income, reflecting in part the high cost of player salaries in both the NBA and NHL. MSG inked a favorable cable deal with MSG Networks prior to the spinoff that results in annual payments of $130 million, with annual escalators.”
Resource #3: Andrew Walker Interview with HedgEye
Back in 2017, Andrew Walker of Rangeley Capital sat down with HedgEye to discuss the MSG idea. You can check out the video here. Here’s one of my favorite bits from the interview:
“Consider a simple sum of its parts valuation for each of MSG’s four main businesses: Forbes currently values the Knicks and Rangers at $3.3 billion and $1.25 billion respectively. The Madison Square Garden arena was recently tax assessed at $1.2 billion (but that doesn’t include the value of the arena’s air rights).
That’s already $5.7 billion.
But don’t forget to add in $1.2 billion in net cash and investments, plus various other assets like the Rockettes and LA concert venue The Forum. Add it all together, Walker says, “Shares could double over the next couple years very easily.”
I had the privilege of having Andrew on the podcast, which you can check out here.