About Madison Square Garden Entertainment Corp.
Madison Square Garden Entertainment (NYSE: MSGE) (“MSGE” or “the Company”) is a world leader in live experiences with a portfolio of iconic venues that includes: New York’s Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and Beacon Theatre; and The Chicago Theatre. In addition, MSG Entertainment is building a new state-of-the-art venue in Las Vegas, MSG Sphere at The Venetian, and has also announced plans to build a second MSG Sphere in London, pending necessary approvals.
The Company produces, presents, or hosts various live entertainment events, including concerts, family shows, and special events, as well as sporting events, such as professional boxing, college basketball, professional bull riding, mixed martial arts, and esports in its venues. Madison Square Garden serves as home to the New York Knicks and New York Rangers professional sports franchises.
MSG Entertainment also features the Radio City Rockettes, the legendary New York dance company that serves as the star of the Christmas Spectacular at Radio City Music Hall, which has been a holiday tradition for 87 years. MSGE’s other properties include Boston Calling Events, which produces New England’s premier Boston Calling Music Festival, and Tao Group Hospitality with popular dining and nightlife brands in New York City, Las Vegas, Los Angeles, Chicago, Singapore, and Australia that include: Tao, Marquee, Lavo, Avenue, Beauty & Essex and Cathédrale. (Sources: MSGE, FINVIZ)
While MSGE has a relatively strong balance sheet with first-class assets it suffers from relatively bloated cost structure and will incur significant capital expenditures for at least the next 3 years. The business will nonetheless turn around sharply once a recovery takes hold, making MSGE rather an opportunistic momentum trade in (early) 2021 than a buy-and-hold investment.
What We Like
Strong Balance Sheet
As of September 30, 2020, MSGE had tangible equity of nearly $2.5 billion ($104/share). Most of the assets were in cash ($926 million) and property/equipment ($1.7 billion). The Company had no long-term debt to speak of and a current ratio of 2.6.
|Property & Equipment ($000)||Sep 30, 2020|
|Furniture and fixtures||41,891|
|Construction in progress||797,827|
|Total Property & Equipment||2,530,712|
|Less accumulated depreciation and amortization||(790,957)|
|Net Property & Equipment||1,739,755|
(Source: MSGE Quarterly Report Fiscal Q1 2021)
The buildings include the previously mentioned ones – first-class venues that are “guaranteed” to draw events and attendance, and enable earning power. “Construction in progress” refers to the development of MSG Sphere.
Currently, MSGE is trading at a 25% discount to tangible book value – current market price is around $78/share compared to tangible book value of $104/share.
On April 17, 2020, the Company became an independent publicly traded company after being spun off from Madison Square Garden Sports Corp. While the timing may have been unfortunate, it is generally a positive move since the Company (and the now separate companies) are now more focused – one on entertainment/hospitality and the other on sports. This makes it easier for investors to evaluate the Company and should enable staff and management to concentrate on one operational area with more vigour than before, and thereby hopefully leading to better results.
MSGE’s businesses – both the entertainment segment and hospitality (Tao Group) division – have suffered severely due to the pandemic. For example, for Q1 fiscal 2021 (quarter ending September 30, 2020), the Company reported revenue that was 92% below prior year quarter.
With news of a vaccine and likely economic reversal coming soon, we view MSGE’s prospects as bright. Business will pick up fast once social life will become more normal with revenues gradually going back to pre-pandemic levels.
What We Don’t Like
Due to the building of MSG Sphere in Las Vegas, and likely in London, the Company faces significant capital expenditures. Since the Las Vegas venue will not open until at first in 2023 these expenditures are likely to remain high for the next years and even further, depending on when (and if) the London venue will complete.
This leads to very negative free cash flows and limits all ability to pay dividends or engage in share repurchases. It may also lead to further indebtedness with potential harm to the balance sheet. (In the quarterly report for the quarter ended September 30, 2020, the Company announced that it had entered into a five-year $650 million senior secured term loan facility in November 2020.)
Overall, this significant cash outlay makes the stock rather unattractive in the near term (3-5 years) since shareholders will not receive any cash flow earnings and might risk relatively low payouts further out in the future if debt becomes an issue or maintenance expenditures rise.
MSGE has two classes of common stock; Class A (1 vote/share; 19.493 million shares outstanding of which the Dolan family owns approximately 4.2%) and Class B (10 votes/share; 4.530 million shares outstanding which the family owns entirely). Effectively the Dolan family owns around 22% (economically) of MSGE but holds roughly 70% voting power.
Classified as an “emerging growth company” and “controlled company” MSGE may elect to not comply with certain requirements, e.g. disclosing certain obligations regarding executive compensation in periodic reports, have a majority of independent directors on the board, have an independent corporate governance and nominating committee, and an independent compensation committee. (Source)
It is also worth mentioning that some executives/directors of MSGE also serve as executives/directors at MSG Sports, MSG Networks and AMC Networks. This partially lowers the beneficial value that should have come from the spinoff.
Having one controlling shareholder can sometimes be good (e.g. a family-owned company with long-standing history and conservative policies) but it can also significantly limit the ability of other shareholders to influence the strategies and governance of MSGE – overall, a negative for the stock.
Bloated Cost Structure/Stock Compensation
Although the Company has great assets, such as Madison Square Garden, it doesn’t seem to translate into strong earnings power. Gross margins have been over 30% but significant operating expenses have eaten that away, resulting in operating losses for the last four years (in part based on estimates for pre-spinoff years) (Tao Group Hospitality delivered operating income in 2018 and 2019, but it is only 24% of MSGE).
Selling, general and administrative expenses (SG&A) have generally been over 25%. And while some of it includes non-capitalized expenditures related to the development of MSG Sphere, a significant part of it (~10%) comes in the form of stock-based compensation.
Nonetheless, the Company has delivered positive operating cash flows (years 2017-2020), averaging roughly $107 million. However, when considering “normal” capital expenditures (using depreciation as an estimate, avg. $106 million, source) MSGE generates no free cash flow. This is not very good for shareholders – getting next to no earnings (in terms of free cash flow) but consistently having their holdings diluted due to new issuance of shares for stock-based compensation. As a result, tangible book value may provide the best proxy for the Company’s valuation (approximately $100/share).
MSGE owns a Gulfstream Aerospace G550 aircraft valued at $38 million (booked value before depreciation). The Company has various time-sharing/dry-lease arrangements with multiple parties (largely individuals and entities controlled by members of the Dolan family, see annual report for fiscal 2020).
A corporate aircraft has often been a signal of excessive spending and an easy target for activist investors. Since MSGE has a controlling shareholder it is unlikely to be faced with any kind of activist pressure. And while clients are required to pay any expenses incurred due to their use of the aircraft, the Company still has the aircraft in its books, likely incurring some maintenance/depreciation expenditures over time. Overall, we don’t see evidence of excess relating to the aircraft (since clients pay fees), but it is still worth mentioning.
Overall, MSGE has good assets and strong balance sheet. The recent spinoff from MSG Sports Corp. brings more focus to operations. And likely pandemic recovery in early 2021 will improve the business substantially.
Significant capital expenditures, high operating expenses and a controlling shareholder will still be a drawback over the next years, making the stock unattractive as a buy-and-hold investment.
Recommendation: Short-term BUY to take advantage of pandemic recovery.
Target Price: $100/share.
Timeframe: Q1 2021 (approx.).
Catalyst(s): Pandemic recovery.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.