Strong Demand For Live Events Will Continue, But Concert Booking Challenges May Affect Earnings

Key Takeaways

• Strong demand for live events and New York City tourism recovery drive increased ticket sales and higher spending, boosting revenue growth.
  
• Strategic initiatives in pricing, marketing, and partnerships enhance ticket sales, sponsorship revenues, and potentially increase net margins and future earnings.
  
• Decreased event bookings and potential loss of tax exemptions, coupled with rising expenses and varying tourism, may challenge MSG Entertainment’s revenue and net margins.

Catalysts

Through its subsidiaries, engages in live entertainment business.

• The strong demand for live events and the ongoing recovery of New York City tourism are driving increased ticket sales and higher per capita spending on food, beverage, and merchandise, positively impacting revenue growth.
  
• The successful implementation of new immersive elements and strategic pricing for the Christmas Spectacular has led to record ticket sales and the potential for further pricing optimization, enhancing revenue and net margins.
  
• The expected growth in special events, such as high-profile productions and sports events at The Garden, suggests an increase in arena license fees and other leasing revenues, contributing to future earnings.
  
• New and renewed marketing partnerships with major brands like Lenovo, Motorola, and Verizon indicate an increase in sponsorship revenues and potentially higher net margins from premium hospitality services.
  
• The ongoing capital return strategy, including stock buybacks, reflects management's confidence in future cash flow generation and is likely to support earnings per share growth.

Madison Square Garden Entertainment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Madison Square Garden Entertainment's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.1% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $87.9 million (and earnings per share of $2.01) by about March 2028, down from $126.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $111.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.1x on those 2028 earnings, up from 11.6x today. This future PE is greater than the current PE for the US Entertainment industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.88%, as per the Simply Wall St company report.

Madison Square Garden Entertainment Future Earnings Per Share Growth

Risks

• The MSG Entertainment business experienced a decrease in the number of events, notably concerts, which resulted in reduced revenues from entertainment offerings. This could negatively affect future revenue growth if booking levels do not recover.
  
• Weaker concert bookings at The Garden could impact future revenues, as the typical booking window poses challenges for predicting and securing events long-term. This could also affect net margins if fixed venue costs are not offset by event revenues.
  
• There is a pending risk of losing the property tax exemption for The Garden, which could result in significant financial burdens and affect net margins negatively.
  
• Higher selling, general, and administrative expenses, including costs related to executive management transitions, may put pressure on net margins if not matched by proportional revenue increases.
  
• While consumer demand appears strong, potential fluctuations in tourism to New York or consumer spending dynamics could impact ticket sales and per capita spending on food, beverage, and merchandise, thus affecting total earnings.

Valuation

• The analysts have a consensus price target of $45.286 for Madison Square Garden Entertainment based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $87.9 million, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of $30.59, the analyst price target of $45.29 is 32.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.