Knicks And Rangers' Playoff Success Will Boost Engagement, But RSN Debt May Impact Financial Stability

Key Takeaways

• Expansion and renovation efforts, along with strategic pricing for season tickets, aim to enhance fan experience and loyalty while boosting revenue.
  
• New marketing partnerships and anticipated higher national media rights fees are expected to significantly elevate brand visibility and media-related income.
  
• Challenges in sports media and RSN industry, coupled with stable ticket pricing and playoff revenue dependency, may limit MSG Sports' financial growth and stability.

Catalysts

Operates as a professional sports company in the United States.

• The successful performance of the Knicks and Rangers, each reaching significant playoff stages, likely boosts fan engagement and sales related to tickets, merchandise, and sponsorships, positively impacting revenue growth.
  
• The decision to maintain season ticket prices for renewing holders while opportunistically pricing new packages aims to balance fan loyalty with revenue generation, potentially increasing ticket sales revenue without alienating the fan base.
  
• Expansion and renovation of premium hospitality spaces and suites are expected to enhance the guest experience and generate higher revenue from these high-value offerings.
  
• Partnerships with new marketing sponsors and the introduction of premium merchandise collaborations could elevate brand visibility and drive incremental merchandise sales revenue.
  
• The anticipation of increased national media rights fees from the NBA's new agreements starting the '25-'26 season might significantly boost media-related income, despite challenges within the regional sports network ecosystem.

Assumptions

• Analysts are assuming Madison Square Garden Sports's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.8% today to 4.1% in 3 years time.
• Analysts expect earnings to reach $46.2 million (and earnings per share of $1.96) by about December 2027, down from $70.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $54.9 million in earnings, and the most bearish expecting $16.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 161.4x on those 2027 earnings, up from 79.6x today. This future PE is greater than the current PE for the US Entertainment industry at 18.0x.
• Analysts expect the number of shares outstanding to decline by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Risks

• The evolving sports media landscape and new NBA media rights agreements could lead to a decrease in the number of exclusive live telecasts for MSG Networks, potentially impacting local media rights revenue and net margins.
  
• The RSN (Regional Sports Network) industry faces challenges, including significant debt maturity for MSG Networks. If refinancing efforts fail, it might negatively affect MSG Sports' local media rights revenue and financial stability.
  
• No increase in season ticket prices for the '24-'25 seasons for renewing holders, although aimed at maintaining loyalty, could limit revenue growth potential, affecting future earnings.
  
• High dependency on playoff performance for revenue boosts makes financial outcomes unpredictable and could impact net margins if teams do not perform consistently well.
  
• Capital allocation towards maintaining liquidity and paying down debt, despite being positive for the balance sheet strength, limits the company's ability to invest in growth opportunities or return capital to shareholders through buybacks or dividends, possibly affecting long-term shareholder value.

Valuation

• The analysts have a consensus price target of $258.8 for Madison Square Garden Sports based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $314.0, and the most bearish reporting a price target of just $230.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $46.2 million, and it would be trading on a PE ratio of 161.4x, assuming you use a discount rate of 7.8%.
• Given the current share price of $232.31, the analyst's price target of $258.8 is 10.2% 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.