Madison Square Garden Sports Corp.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Madison Square Garden Sports Corp. owns and operates sports teams and venues, primarily centered in New York City, and also manages sports and entertainment events.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

MSGS operates primarily in the sports and entertainment industry. It’s a holding company owning both sports teams, particularly the New York Knicks (NBA) and the New York Rangers (NHL), and entertainment venues, such as Madison Square Garden itself, and Radio City Music Hall. In addition, it manages sports and entertainment events. The company also operates the MSG Networks, which broadcasts regional sports content.

The company’s revenue streams primarily revolve around the following:

  • Ticketing: This includes all ticket sales from sporting events and other events at MSG and MSG-affiliated venues.
  • Media Rights: This includes money from broadcasting agreements from the NBA and NHL, as well as with other networks.
  • Advertising & Sponsorship: This includes revenue streams from the sale of advertising and sponsorship rights for their teams and events.
  • Food, Beverage & Merchandise: This includes revenue generated from sales at the venue concessions and from team merchandise.
  • Venue-related revenue: From their owned venue, Madison Square Garden, and from their partner venues like the Radio City Music Hall.
  • Other revenue: primarily from their performance venue in Los Angeles.

The sports industry faces increasing competition, as well as the constant need to remain fresh and exciting for fans to justify the high prices for tickets and merchandise. Media rights have become an extremely important part of revenues for the teams, making them sensitive to any changes in their broadcasting agreements. The COVID-19 pandemic has drastically impacted revenue in the industry, but it has slowly rebounded since then. Macroeconomic conditions such as inflation or higher interest rates may affect disposable incomes, which in turn may affect how much people spend on leisure activities such as attending sports events.

The nature of the sports industry requires constant investment into the teams and talent to maintain a winning position. This makes it extremely difficult to maintain a high and consistent ROIC for long periods of time. Sports teams also have little control on external factors that have immense power to change revenues.

  • League Rules: Rules around free agency, drafts, salary caps, and promotion and relegation have major impacts on the profitability and operations of teams.
  • Player Performance and Injuries: Injuries to high-value assets, or sudden dropoffs in performance, can have immense effects on the success of the team and consequently revenues.
  • Market Factors: The health of the economy, changing viewer preference, and the popularity of the team all change the value and interest in attending and consuming games.

The company has a complex financial structure, due to its wide range of activities and contracts, making it tough for the layperson to fully grasp its inner workings.

Management’s commentary on the financials of the business is typically very transparent, making it easier to ascertain how they derive profits. However, the complex nature of financial statements still reduces the understandability of their operations.

Competitive Landscape

MSGS operates within a competitive landscape where multiple factors influence success. Their core businesses of professional sports teams are subject to the competitive nature of professional leagues, the need for constant investment in talent and players, and the cyclical nature of sports fandom. Furthermore, their venues compete with other entertainment options and venues in the New York City metro area and in the markets where their teams play.

The company’s competitive advantages are:

  • Iconic Brands: The New York Knicks and New York Rangers are among the most recognizable and valuable franchises in their respective leagues, a brand that carries a lot of premium for the company.
  • Prime Locations: Madison Square Garden is located in Manhattan and has a long-term history in events and in entertainment, and as such a very recognizable brand of itself, similar to that of Radio City Music Hall. The location makes it very difficult for new entrants to create a similar venue within proximity of Manhattan.
  • Exclusive League Partnerships: The partnerships with the NBA and NHL give them exclusive access to all their business that comes with being associated with the league.

Moat Analysis: 2 / 5

MSGS doesn’t have a wide-moat business, though it does have some competitive advantages. Its economic moat, which is essentially the ability for the business to consistently produce high returns on invested capital, is at a 2 out of 5.

Here’s why:

  • Intangible assets: MSGS has two very strong brands, the Knicks and the Rangers, along with the recognizable venue of MSG. Though, these brands aren’t as strong as brands in other sectors of the consumer discretionary and staples sectors. The strength of the brands are also tied to their performances in their respective leagues, making them less dependable than other brands.
  • Switching Costs: There are no switching costs to going to a rival team or entertainment venue as opposed to MSGS, which makes the moats weak. There is no guarantee that a customer who previously attended a Knicks game will still be attending them if a competing team has a more attractive offering. The switch can be made very easily.
  • Network Effects: Though it is an advantage that MSGS owns and operates various different businesses that complement each other (e.g. MSG Networks, Radio City, Knicks, Rangers, MSG entertainment), it does not have strong, clear network effects. The success of the venue is also not entirely dependent on other parts of MSGS business.
  • Cost Advantages: The company does have some operating efficiency benefits through its history and size, but lacks in true cost advantages. The company has substantial amounts of debt, and the costs associated with running a professional sporting team and venue can vary considerably based on talent and external factors, such as rising energy prices. As such, the company doesn’t have a durable cost advantage that is sustainable over the long term.

Risks to the Moat and Business Resilience

  • Poor Performances: The fortunes of MSGS are tied very closely to their on-field and on-court success. If the Knicks and/or Rangers underperform for a substantial number of years, the interest in their products and events will decline, affecting ticket sales, revenue from media rights, and merchandise sales.
  • Increased Competition: Other sporting teams and entertainment venues, both inside and outside their core locations can offer significant competition to MSGS if they are well-managed. In addition to sporting teams, other areas of entertainment, such as cinemas and theaters, can erode the revenues of MSG.
  • Changing Media Landscape: The revenue streams that come from broadcast rights may be affected by changes in the overall media landscape, if there is reduced interest in the leagues themselves or if new streaming platforms and services continue to erode away from traditional cable and TV, hurting prices.
  • Economic Downturn: A recession or economic downturn could potentially reduce discretionary spending on leisure activities, thus hurting the company’s revenue streams.
  • Management Missteps: Though management is less important than the quality of the industry itself, as mentioned in “The Little Book that Builds Wealth”, major mismanagement could still have a negative impact on the business.
  • Increased Player Costs: Player salaries continue to climb, and so too do contract extensions. These costs place added pressures on profitability, and the inability to retain high-profile players can negatively affect performance.
  • Health and Safety issues: As seen from the COVID-19 pandemic, health and safety restrictions can drastically curtail operations. Also, any major health scare from the sports teams themselves can hurt game attendance and broadcast revenue.
  • Macroeconomic uncertainty: Inflation or higher interest rates can affect disposable income, which in turn may affect the success of the company. Rising debt levels can also be affected by rising interest rates which further erodes profitability.

Despite all these risks, MSGS has substantial strengths and is likely to survive the volatility of the market for a good while. The company’s brand, historical significance, and partnership with major sporting leagues provide some protection to revenues that aren’t readily replicable, while the ability to also generate revenues through its venues and network provides some diversification.

In-Depth Financials

Here are some key metrics on Madison Square Garden Sports Corp.:

  • Revenue: The company’s revenues are derived from two major areas - sports and entertainment. Total revenues for fiscal year 2022 were $741.9 million, and they grew to $852.8 million by the year ending June 30, 2023. In the first quarter of FY2024, revenues stood at $105.7 million, compared to the same period last year, $141.9m. This decrease is due to the lower volume of games played compared to the first quarter of 2023.

    • Ticket revenues are a significant source of income for MSGS, but are highly cyclical, especially dependent on the popularity of the team and timing of the games. During the COVID-19 pandemic, revenues were completely wiped out by health and safety regulations, making this a high-risk source of income for the company if there are any future similar threats.
    • The company has also started to use MSG network to increase its revenue stream, showing increasing revenues and profitability from their regional sports networks. This is a valuable source of income due to the stability provided by broadcasting rights agreements, as well as the increasing amounts that are being paid to leagues and teams.
    • For a company with high fixed costs, maintaining consistent revenues is essential for profitability. Any dips in revenues due to an economic slowdown or underperformance of their businesses could have a sizable impact on the company’s profitability.

  • Operating Expenses: MSGS has high operating costs related to their various operations. For the fiscal year ending June 30, 2023, operating expenses totaled $800.7m. Key expenses include costs associated with games, such as player salaries and stadium upkeep, costs associated with selling and marketing, and administrative costs.

    • Operating expenses are difficult to cut down, since they are typically fixed, for the most part. Personnel and contractual obligations make up a huge part of these costs, and they are more or less guaranteed regardless of the performance of the company or the teams.

  • Profitability: Net income for 2022 was around $185m, whereas for 2023 it came up to $77.9 million, with net loss in the most recent quarter of $22.3 million. This change is mainly driven by the varying operating income, and the net income was further affected due to a loss on extinguishment of debt in Q1 of FY2024.

    • The company’s profitability has fluctuated greatly over time. The COVID-19 pandemic has created volatile financial conditions for the company and had a significant effect on their operating revenues and net income. These effects may linger on if there are any similar situations that reduce the value of live events.
    • The company is also at risk of high operating costs reducing profitability. As wages increase, as well as the prices of goods needed for their businesses, their bottom line may be impacted.
  • Balance Sheet Health: MSGS has a high amount of debt on the balance sheet. Total liabilities stood at $1.77bn, versus cash and cash equivalents of $102.8m. Total equity stood at -337.2m. While this high debt puts some burden on the company, the asset base of MSGS, especially the valuable brand of MSG, more than makes up for that debt as it helps generate high operating profits for the company. The debt is being reduced over time, indicating management understands the need to reduce its debt load for more financial flexibility.
  • The company has also had a consistent cash burn, which has been partially offset by debt and equity raises. As of Q1 of FY24, the company has almost 100 million in cash equivalents but that also comes with nearly 1 billion in debt.

Understandability: 3 / 5

A company with this large amount of operations and complex financials might sound difficult for many to grasp. While it does have various moving parts, the overall business model is not too complicated for someone to understand. Sports teams and entertainment venues are things that most people will easily grasp the basics of.

  • Understanding its multiple revenue streams and business model is not too complicated, but it is very important to know these things for the purposes of analyzing the company.
  • There are some accounting irregularities, especially in goodwill and accounting of joint ventures, which may obfuscate the performance of MSGS.
  • A further understanding of the different moving parts of the business requires reading through filings and press releases of the company.

Balance Sheet Health: 4 / 5

While the company carries a lot of debt and has a history of some negative free cash flow due to expansionary goals, the debt profile of the company is still manageable and is supported by a valuable business. The long-term assets help offset this level of debt, and the company is also actively trying to reduce its obligations. Overall, the company has a healthy balance sheet and good liquidity to maintain operations and fund future growth. However, some risk remains with the large amounts of debt and that is offset due to a manageable interest coverage.