Tonight marks the end of the NBA Eastern Conference finals, and the New York Knicks are certainly disappointed to be watching from home. The Knicks stockholders, however, could not be happier with this season’s outcome.
The Knicks are fresh off their most successful season in over a decade. Simultaneously, the publicly traded Madison Square Garden Company (MSG), which owns the Knicks, has soared 50 percent since the beginning of the 2012-13 NBA season.
Can this huge run in MSG stock be attributed to coincidence, the real-estate recovery, or the broader stock market rally? Or, is MSG a natural derivative play on the day-to-day success of the New York Knicks?
The Knicks are one of the NBA’s most profitable franchises on a per-game basis, so the deeper they play in the playoffs, the more income MSG earns for its shareholders. According to CNBC, the Knicks earn around $1.5M in operating cash flow for each additional playoff game. Therefore, an extra game only results in around $0.02 in earnings per share. The Knicks played six home playoff games this season, which means that it probably added a few pennies to its EPS. This should be enough to boost the stock a few percentage points based on its valuation.
However, MSG is up around 50 percent since the Knicks established themselves as legitimate playoff contenders earlier in the season. So why is there such a massive discrepancy?
The true value of the Knicks franchise isn’t in ticket revenue, Carmelo Anthony jersey sales, or hot dog proceeds, but in media rights. MSG owns the Knicks and the rights to broadcast its games. These media rights are worth billions, and the better the Knicks perform on the court, the more valuable these rights are.
In 2011, the LA Lakers signed a 20-year, $3 billion with Time Warner Cable for the full rights to broadcast its games. Two years later, the LA Dodgers signed a 25-year, $7 billion - $8 billion contract with Time Warner Cable. The Knicks play in a similar media market and have a higher market value than the Lakers, so it’s not unreasonable to assume these rights could fetch $4 billion over the same timeframe. Meanwhile, MSG, which also owns the NY Rangers and many other venues across the country, has a market cap of only $4.5 billion.
Naturally, winning produces viewership, which drives advertising revenue. The Lakers and Dodgers received huge paydays from Time Warner Cable not only because of their exposure to the LA media market, but also because of their commitment to on-court success. The Lakers seem to be in the hunt for a championship every season. Meanwhile, the Dodgers are one of baseball’s most storied franchises. It earned its TV contract after the team was sold to a “win-first” ownership group and signed Matt Kemp and Zack Greinke long-term contracts.
There is a direct correlation, therefore, between expected long-term, on-court performance and the value of a team’s media rights. After years of mediocrity, the Knicks finally established themselves as long-term contenders this season. As a result, the Knicks boosted the value of their media rights and franchise as a whole by hundreds of millions of dollars. These gains are the driving force that boosted MSG’s stock over the last 6 months.
Thus, buying MSG stock is an excellent play on the “macro” success of the Knicks. This correlation between on-court success and MSG market value was affirmed during three different time periods: LeBron James’ free agency, “Linsanity,” and the Knicks 2013 playoff run.
In 2010, MSG traded with high volatility on speculation that LeBron James would sign long-term with New York. Signing LeBron James would have guaranteed yearly playoff success and significantly higher ad revenue, and the Knicks quickly emerged as a favorite to land the league’s best player. As a result, MSG stock spiked almost 10 percent from $19.67 on June 30 to $21.57 on July 7. The next day, LeBron signed with the Miami Heat, sending the stock back down 10 percent on July 9.
The following year, the Knicks “macro trade” became popular once again during “Linsanisty.” MSG stock traded with high volume as investors speculated that the sensational play of Jeremy Lin was sustainable and would result in bidding frenzy to purchase the Knicks’ international television rights. As a result, the stock rose from $29.32 on February 3 (the date before Lin’s debut) to $33.43 on February 21, which boosted MSG’s market cap by 14 percent or $315M. When Lin got injured on March 24, the stock dropped to $31.85.
Surely, there could have been other factors involved in MSG’s volatile stock movement during Linsanity and LeBron’s free agency. The market traded with high activity during both time periods; investors feared a double-drip recession in summer 2010 while the market soared during winter 2011. However, MSG traded with abnormally high volume during both events. The stock also moved in near-perfect correlation with news related to both players. We can assume, therefore, that there is a three-way direct correlation between the Knicks’ expected on-court success, the value of the Knicks’ media rights, and MSG’s stock.
After the recently concluded 2012-13 season, Knicks all-star Carmelo Anthony said in his exit interview, “We took huge steps…this was the first year the pieces of the puzzle started to fall into place. We’re only going to get better from here on out.” MSG’s massive stock gains say that investors agree, but the stock has pulled back $62.53 to $58.62 since the Knicks were eliminated in the second round.
Unfortunately, the new long-term success of the Knicks is likely priced into the stock. MSG now trades at 34 times earnings, which seems appropriate given the NBA’s franchise value growth rate of 30 percent, the strengthening economy, and MSG’s exposure to the red-hot real estate market. Thus, even if the Knicks repeat this year’s success in 2013-14, MSG likely will not repeat this year’s stock performance.
However, the next chance to buy MSG as a play on the Knicks’ macro success will be in 2014 when a plethora of premier NBA free agents hit the open market. During that offseason, the Knicks will have a chance to reinvent themselves once again and establish themselves not as a second round playoff team, but as championship contenders.
If this occurs, the Knicks will cause another huge boost in the value of its TV rights, franchise value, and MSG stock.
By Joseph Goldman
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