Madison Square Garden Spun-Off Its Sport And Entertainment Businesses. Here’s Why Both Stocks Are Undervalued, Investors Say

TOPLINE

With Madison Square Garden successfully completing the separation of its sports and entertainment businesses last month, the spinoff created two separate stocks which are both currently undervalued, according to market experts.

Revenue potential from The Sphere, Las Vegas project may be getting overlooked by the market.

Eduardo Munoz/Corbis via Getty Images

KEY FACTS

Last month, the Madison Square Garden Company completed the spinoff of MSG Entertainment (which operates Madison Square Garden and other venues), and renamed itself MSG Sports (which owns the New York Rangers and New York Knicks sports teams). Investors say that the spinoff has created a big opportunity.

“Both companies are trading at significant discounts to what we think they’re valued at,” says Christopher Marangi, co-chief investment officer at Gamco, which owns around 1.1 million shares each of MSGS and MSGE. “Coronavirus has clouded the near-term outlook, but long-term that hasn’t changed the value in these businesses.”

“Long-term, these are great stocks with enormous value,” says Jim Osman, CEO of The Edge Consulting Group, who doesn’t own direct stakes in either stock. At current market prices, he says MSGS is trading at about a 30% discount to its net asset-based valuation, while MSGE is trading at a nearly 50% discount.

One reason investors are optimistic: The Sphere, a 17,500 capacity stadium in Las Vegas. Though construction has been delayed and the opening has been pushed beyond 2021 due to coronavirus shutdowns, the new venue is fully funded and “will unlock a new revenue stream” for MSGE, Osman says.

Analysts say the venue is a smart play on e-sports that could be profitable for both entities; the Sphere is expected to capitalize on this growing trend of virtual entertainment—where spectators pay to watch live video game events remotely.

The Sphere is a “unique asset,” Marangi says, but at the moment, “the market is giving MSGE no credit for that asset.” In fact, investors are worried coronavirus shutdowns could affect construction, and they’re also concerned about the long-term impact of crowded venues and event spaces in the age of social-distancing.

In addition to revenue potential from the Sphere, “you get the value in the Garden itself,” he argues, which includes everything from live events to air rights—worth north of $500 million, according to Osman.

Crucial statistics

The two companies started trading under separate tickers on April 20. Since then, shares of MSGE have jumped nearly 24% to around $80 per share, while MSGS is largely flat, at $168 per share. Wall Street analysts are bullish on both stocks: 91% assign a “buy” rating for MSGS, while 100% assign a “buy” rating for MSGE, according to Bloomberg data. The Edge puts its base case price targets for MSGE and MSGS at $95 per share and $206 per share, respectively. Investment researcher, Morningstar, puts MSGE at a 29% discount from fair value and MSGS at a 13% discount.

Crucial quote

“As was demonstrated by ratings for the NFL draft, there’s a hunger for sports that isn’t going away,” Marangi says. “There’s lots of pent up demand for those games once they come back.”

Tangent

Gamco, which is run by billionaire investor Mario Gabelli—who has for years been a fan of Madison Square Garden stock, owns about 1.1 million shares in each company. Based on current market prices, that amounts to an $88 million stake in MSGE and a nearly $185 million stake in MSGS. Gabelli has a net worth of $1.6 billion, according to Forbes’ estimates.

Key background

The Madison Square Garden Company originally announced that its board of directors had approved the separation of its entertainment and sports businesses in November 2019. The spinoff was completed on April 17, 2020: MSGE had a market cap of $1.6 billion, while MSGS had a market cap of $4.4 billion. The entertainment business is led by chairman and CEO James Dolan, while the sports business is run by CEO, Andrew Lustgarten, who has been with MSG since 2014 and before that served as a vice president of the NBA.