Madison Square Garden: Highly dependent on 'Melo'

By Vinayak on Sunday, September 8, 2013 with 0 comments

NBA Superstar Carmelo Anthony coming to the New York Knicks has had a major impact (a positive one) on Madison Square Garden (NASDAQ: MSG) stock. TV ratings have surged along with merchandise sales and season ticket sales.

Anthony is actually the #1 jersey seller in the NBA, beating out even LeBron James.  As mentioned earlier, Anthony drives TV ratings. His first game with the Knicks was the highest-rated game in 16 years. This has had a profound impact on the Knicks with the season-ticket renewal rate at the highest level in ten years. Furthermore, 2011-2012 was the highest-rated regular season in MSG history and up 81% since the prior year.

In Anthony's first full season with the Knicks, sports revenue went up by 16.5%, a bigger gain than the 6.4% average rise over the four-year period from 2010-2013. Sports operating income increased by at least 250% in the first two seasons of Anthony's Knicks career.

Anthony was responsible for the Knicks making the playoffs for the first time in seven years. Additionally, they managed to host two games at The Garden. It is estimated that home playoff games generate $3-4 million per game and so it can be deduced that Melo was primarily responsible for $6-8M of the year-over-year gain. Moreover, over the three seasons that Carmelo has played for the Knicks, the New York basketball team has hosted ten playoff games, roughly equivalent to $30-40M in additional revenue.

All this is very nice to hear, but there has not been any consideration for how the Media segment is affected by Anthony's arrival. MSG has acknowledged that this segment relies a lot on the success of its sports teams: "The financial performance of our MSG Media segment is affected by the affiliation arrangements we are able to negotiate with Distributors and also by the advertising rates we can charge advertisers. These factors in turn depend on the popularity and/or on-court and on-ice competitiveness of the professional sports teams carried on MSG networks."

Media revenue itself surged by $200M since the baseline established in 2010. I am not pointing out that all of this revenue should be attributed to Anthony's performance. The fact is that MSG has made an effort to diversify its portfolio, and the acquisition of Fuse comes to mind. At the same time, it is fair to state that MSG has taken advantage of the skyrocketing TV ratings that the All-Star Forward has been largely responsible for. This has definitely helped MSG by providing it with more leverage in the negotiation of affiliation fees and advertising rates.

Why should investors care?

Using an average revenue growth rate from 2010 and 2011, prior to Anthony's arrival, it is estimated that Carmelo Anthony is worth more than $50M a year just sports revenue to MSG. When taking into account that even the media segment has raised revenues by more than $200M since 2009, a case can be made that Anthony is a major reason for this to happen. All things considered, it is plausible that Anthony is worth at least $100 million a year to MSG. So if Anthony does not sign the six-year maximum deal NBA contract, MSG could lose as much as $600M provided they aren't able to find another All-Star of his caliber to wear the Knicks uniform.

Source: Basketball Player Could Make Or Break Madison Square Garden StockGiven the positive correlation between his signing and the spike in revenue, it will be interesting to see what Anthony decides after the 2013-14 NBA season is done and dusted. As we all know, Anthony is expected to opt-out of his current contract with the Knicks after the 2013-2014 season. I hope this article has provided investors with insights into the significant long-term risk that MSG shares are faced with depending on the outcome of Anthony's contract situation.

Nonetheless, it seems like a good time to buy MSG stock now while watching Anthony's contract situation closely and then short the stock if it looks like he may make a move signs.  If Anthony were to leaver, it is conceivable that MSG's stock price could fall to 2010/2011 level as revenue levels drop.

Category: Stocks



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