Madison Square Garden Sports: Quarterly Double-Digit Net Sales Growth, And Not Expensive -LSB

Madison Square Garden Sports Corp. (NYSE:MSGS) is the owner of a strong portfolio of sports assets and intangibles. Recently, MSGS delivered significant quarterly double-digit net sales growth and appears to be operating in a market that could grow at a CAGR of close to 21.26% from 2021 to 2028. There are obvious risks from failed games, failed development of events, or competitions from other teams in New York, however, I do not think that company is expensive.

Madison Square Garden Sports Corp.

Madison Square Garden Sports Corp. is a New York-based corporation that engages in various business activities through its subsidiaries. It provides sports entertainment and services.

Madison Square Garden Sports Corp. owns and operates a portfolio of sports assets, including renowned teams such as the NBA’s New York Knicks and the NHL’s New York Rangers. Its main stage is Madison Square Garden, known as the most famous stadium in the world.

In addition to core teams, the company also owns development teams, such as the Hartford Wolf Pack and the Westchester Knicks, as well as e-sports franchises, such as Knicks Gaming, and a majority stake in Counter Logic Gaming. The company benefits from its presence in the New York metropolitan area, its passionate fan base, and long-term sponsorship and media rights agreements.

The Asset/Liability Ratio Is Under One, But The Company Reports A Significant Amount Of Intangible Assets

As of September 30, 2023, the company reported cash and cash equivalents worth $51 million, restricted cash of about $1 million, and total current assets of about $200 million. I dislike the fact that the total amount of current liabilities is larger than the current amount of assets, however, Madison Square Garden owns a significant number of intangible assets and sublease agreements, which may be useful for obtaining debt agreements.

The Company is party to a Sublease Agreement with MSG Entertainment for office space of approximately 47,000 square feet housing the Company’s administrative and executive offices at Two Pennsylvania Plaza in New York City. Source: 10-k

Right-of-use lease assets are equal to $713 million, with goodwill worth $226 million, and total assets of about $1366 million. The asset/liability ratio is under one, which is not at all ideal.

I am not really worried about the list of liabilities because of the agreements with well-known brands. With that, I believe that investors need to study the debt agreements reported by Madison Square Garden.

With league-related accruals worth $80 million, deferred revenue close to $300 million, and total current liabilities of about $553 million, long-term debt stands at about $370 million. Additionally, with operating lease liabilities worth $734 million and defined benefit obligations of about $4 million, total liabilities are equal to $1.724 billion.

Debts

Madison Square Garden Sports Corp.’s subsidiary, the New York Knicks, LLC, has a revolving credit facility that allows it to obtain financing for its working capital needs and general corporate purposes. The Knicks’ 2021 revolving line of credit matures on December 14, 2026. The loans bear interest at a floating rate and are secured by assets of Knicks LLC.

The credit agreements were signed with several debt investors, including an interest rate of close to 6.4% in a revolving credit facility and SOFR plus a credit spread adjustment. With these figures in mind, I think that assuming a cost of capital of around 6.5% and 8% would make sense.

The outstanding balance under the 2021 Knicks Revolving Credit Facility was $235,000 as of June 30, 2023, which was recorded as Long-term debt in the accompanying consolidated balance sheet. The interest rate on the 2021 Knicks Revolving Credit Facility as of June 30, 2023 was 6.43%. During the year ended June 30, 2023 the Company made interest payments of $13,085 in respect of the 2021 Knicks Revolving Credit Facility. In addition, on July 10, 2023, the Company borrowed an additional $25,000 under the 2021 Knicks Revolving Credit Facility. Source: 10-kAll borrowings under the 2021 Rangers Revolving Credit Facility are subject to the satisfaction of certain customary conditions. Borrowings under the 2021 Rangers Revolving Credit Facility bear interest at a floating rate, which at the option of Rangers LLC may be either (i) a base rate plus a margin ranging from 0.500% to 1.000% per annum or (ii) term SOFR plus a credit spread adjustment of 0.100% per annum plus a margin ranging from 1.500% to 2.000% per annum depending on the credit rating applicable to the NHL’s league-wide credit facility. Source: 10-k

Further Development Of High-performance Teams And Better Ticketing Strategies Will Most Likely Bring Asset Generation And Business Potential.

From Madison Square Garden Sports, I would expect further development of high-performance teams that compete for championships and establishment of direct relationship with fans through ticketing. Given the assets owned, the know-how accumulated, and the expertise accumulated by the Board Of Directors, I think that we can expect further agreements with well-known brands. As an example, please have a look at the profile of Mr. Dolan and his connections with AMC Networks.

Prior to his role as Cablevision CEO, Mr. Dolan was CEO of Rainbow Media Holdings, the former Cablevision programming subsidiary now known as AMC Networks. Mr. Dolan began his career with Cablevision in the 1970s and held a variety of executive positions before overseeing Rainbow Media. Source: James L. Dolan, Executive Chairman

Development Of Exclusive Live Sports Content And Sponsorship Could Also Bring Substantial Net Sales Growth

I believe that maximizing the value of its exclusive live sports content and utilizing unique assets and an integrated approach to drive sponsorship could bring net sales growth. We are talking about a market expected to grow at a CAGR of 21.26% from 2021 to 2028. Hence, I believe that Madison Square Garden Sports Corp. could obtain similar net sales growth or even larger than the current market growth.

Sports Online Live Video Streaming Market was valued at USD 18,119.35 Million in 2020 and is projected to reach USD 87,338.11 Million by 2028, growing at a CAGR of 21.26% from 2021 to 2028. Source: Global Sports Online Live Video Streaming Market Size By Product, By Application, By Geographic Scope And Forecast

Further Investments In Fan Experience And Loyalty From Fan Bases May Also Bring Continuous Net Sales Growth

If the company continues to invest in the fan experience to deliver world-class operations, innovative event presentations, and exclusive merchandise, I would expect net sales growth. Let’s keep in mind that its strategy is based on its unique position in the New York market and the loyalty of its passionate fan base. In my view, you do not really have to invest a lot of money in marketing to sell games with the Knicks or the New York Rangers.

With The Recent Quarterly Net Sales Growth Of 79% And The Beneficial Expectations Of Other Analysts, Demand For The Stock Could Creep Up

In the three months ended September 30, 2023, the company reported $43 million, which represents 79% more than that in the same quarter in 2022. With these figures, I believe that more investors may have a look at the company and its assets. Additionally, it makes justifying a higher EV/FCF multiple quite easier.

With beneficial figures reported for the years 2024, 2025, and 2026, I believe that we may see some demand for the stock. 2026 net sales are expected to be close to $966 million, with 2026 EBITDA close to $106 million, net income of $73.1 million, and free cash flow of $75 million. It is worth noting that analysts are expecting operating margin growth in 2025 and 2026 as well as FCF growth in 2026.

The Stock Repurchase Program Could Accelerate The Demand For The Stock

I also believe that further repurchase of shares by the company would most likely accelerate the demand for the stock. At some point, more stock repurchases could push the stock price up.

As of September 30, 2023, the Company had $184,639 of availability remaining under its stock repurchase authorization. Source: 10-Q

Considering The Previous Assumptions, I Designed A Best Case Scenario

Under my best case scenario, I assumed net income growth in line with previous cash flow statements as well as significant FCF growth. I assumed that some of the previous assumptions would bring business growth.

My cash flow statement projections include 2028 net income of $110 million, D&A of close to -$3.055 million, changes in accounts receivable of $106.05 million, and changes in net related party receivables of $45.05 million.

Additionally, with changes in prepaid expenses and other assets worth $25.05 million, changes in investments of -$24.05 million, and changes in accounts payable close to -$9.05 million, 2028 CFO would be $306.05 million, with 2028 FCF close to $305.05 million.

With the given FCF, I also assumed a WACC of 6.55% with EV/FCF of 22.5x, which implied a valuation of close to $228.455 per share. The company did not use a discount rate far from 6.55% in the last quarterly report, so I believe that my discount rate is not that far from reality.

The weighted average discount rate was 7.1% as of September 30, 2023 and represented the Company’s estimated incremental borrowing rate, assuming a secured borrowing, based on the remaining lease term at the time of either (i) adoption of the standard or (ii) the period in which the lease term expectation commenced or was modified. Source: 10-Q

Risks: Failed Games, Lower Team Popularity, And Risks Related To The Debt Levels Are Worth Considering.

Company’s financial results depend largely on the popularity and on-field success of its sports teams, especially the Knicks and Rangers. Team popularity influences sales of tickets, suites, sponsorships, food, beverages, and merchandise. Regular season success and playoff participation generate additional revenue and increase interest in the teams, which can fuel various revenue streams in subsequent seasons. However, they cannot guarantee that their teams will maintain their popularity or compete in the postseason in the future. Additionally, league, team, or player actions, including protests, can affect the popularity of teams and the leagues in which they compete.

With The Previous Risks, I Designed A Bearish Case Scenario

In the past, the company reported as much as 80% net sales growth along with net income growth and FCF growth. Given previous cash flow statements and my previous risks, I included below what I believe is a bearish case scenario.

Under my bearish case scenario, I included 2028 net income of close to $124 million, depreciation and amortization worth -$2 million, share-based compensation expense of -$56 million, and provision for deferred income taxes of about $6 million.

Additionally, with accounts receivable of about $12 million, changes in net related party receivables of $71 million, and changes in prepaid expenses close to $32 million, I also included changes in accounts payable of close to -$14 million. In addition, with deferred revenue of about -$1 million and operating lease right-of-use assets and lease liabilities close to $11 million, 2028 CFO would be close to $223 million with 2028 FCF of $220 million.

In the past, the company traded at 35x EBITDA and 19x-22x FCF, so I believe that assuming an EV/FCF of close to 19x would make sense in this case.

If we also assume a WACC of 8%, the implied enterprise value would be close to $3.57 billion, and the forecast price would be about $134.9 per share.

Competitors

In my opinion, Madison Square Garden Sports Corp. faces strong competition in the New York market due to the presence of numerous sporting teams and events. In addition to the NBA, NHL, AHL, and NBAGL teams they own and operate, there are other big-name teams in various professional leagues, including baseball, soccer, and American football. This competition is based on the quality of the teams, their success in the leagues, the game experience offered, and ticket prices. Additionally, in NHL and NBA sports, they compete with other teams in the same league and with the leagues themselves. The performance of sports teams as well as economic, health, and safety conditions also affect the revenue generated. The company also faces competition in the esports space through its participation in CLG.

Opinion

In my opinion, Madison Square Garden Sports Corp. is a company with a strong portfolio of sports assets and a strategy focused on long-term growth and increasing value. Additionally, given the growth of the sports online live video streaming market, which is close to a CAGR of 21.26%, and the expertise of management, I believe that the development of exclusive live sports content and sponsorships could bring significant net FCF growth. I do see risks from competition in the New York market, which appears to be intense, with numerous sporting teams and events vying for fans’ attention. However, I see some more upside potential in the stock market price than downside risks.