MSG Sports: Increasing Asset Valuations

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MSG Sports Earnings Update

MSG Sports ($MSGS), the holding company for two major professional sports teams, the NBA’s New York Knicks and the NHL’s New York Rangers, reported fiscal 2021 second-quarter earnings yesterday.

The result?

It was ugly.

Here are the details:

• Revenue of $28.8 million, which represented a 90% drop year-over-year.

• Reported a $41.1 million loss, compared to a $92.4 million profit in the last calendar quarter of 2019.

To be fair, the results shouldn’t be surprising.

Not only are fans not allowed to attend games in person, but the NHL and NBA both started later than usual, negatively impacting the companies financial results.

Here’s what I mean…

In a typical year, the Knicks and Rangers would have played a total of 75 or more games during the period. This year, the NHL didn’t start until January, and the Knicks played a total of 9 games — including preseason, home, and away games.

Remember, not only were minimal games played, but not a single ticket, hot dog, t-shirt, or beer was purchased by fans either.

That’s obviously an issue.

As for the market’s reaction, it wasn’t as bad.

$MSGS dropped slightly in the morning following the announcement but rebounded to finish the day +0.33% — most likely a result of positive commentary on the actual earnings call.

Still, since the pandemic started early last year, MSG Sports Corp has seen its stock decline about 25%.

Outside of the obvious disappointment in earnings, profitability, and future outlook without fans in attendance, investors seemed to rally around a few positives.

First, MSG Sports president and CEO Andrew Lustgarten said that about 75% of season ticket holders have already renewed for next season.

Here are a couple of thoughts:

1. That number was aided by MSG’s willingness to take “very low” deposit amounts and not yet charge people on renewals to be accommodating.

2. They’re able to do this because there is no concern regarding short-term liquidity; the Knicks and Rangers collectively have hundreds of millions of dollars available, should they need it, through existing credit lines and recent debt raises by their respective leagues.

While it’s true that a 75% season ticket renewal rate would be considered low in a typical year, as we know, 2020 was anything but typical.

In my opinion, it’s a positive.

Outside of statements regarding future revenue from season tickets, most of the positivity revolved around increased asset valuations.

MSG Sports Corp management bragged about their talented, young, and promising core of athletes, including Obi Toppin and Immanuel Quickly for the Knicks and Alexis Lafreniere for the Rangers, but let’s be honest — they have nothing to do with it.

When it comes to professional sports assets, winning doesn’t matter — location does.

Check this out…

Along with team valuations increasing with no end in sight, MSG Sports CEO Andrew Lustgarent discussed the NBA’s new framework, which will allow private equity firms to own minority stakes in multiple franchises.

His opinion?

“We believe it will help drive team valuations.”

Me too, Andrew, me too.

While it’s important to note that the physical real estate of Madison Square Garden is housed under a separate entity — Madison Square Garden Entertainment — and the Knicks pay a licensing fee to use it, it’s become almost universal opinion that should James Dolan end up selling the team in the future, the Knicks would sell for much more than their current stock market valuation.

To be clear, James Dolan hasn’t expressed any interest in selling the team, but the inclusion of additional investors via private equity has investors excited about future valuations.

My take?

They should be excited.

Lastly, with New York State Governor Andrew Cuomo appearing to reverse his long-held opposition to mobile sports betting last month, MSG Sports Corp briefly touched on the topic.

The timing is unclear, but the potential legalization of sports betting in the state presents an enormous opportunity, both from a marketing and revenue share perspective.

In the end, my thesis on MSG Sports Corp is simple:

As professional sports franchise valuations continue to rise due to various factors, whether the Knicks and Rangers win or lose won’t matter; MSG Sports Corp will benefit regardless.

Have a great day, and we’ll talk tomorrow.

PS. If you want to read through the entire earnings call, you can check out the transcript here.

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