Knicks Win, Rangers Lose: Either Way, MSG Remains a Buy

NEW YORK (TheStreet) -- Over the weekend, Madison Square Garden's (MSG) New York Knicks hung on in the NBA Playoffs, beating the Miami Heat 89-87. In the NHL's Eastern Conference semifinal series, the Rangers fell to the Washington Capitals, 3-2. Although the Rangers appear to have a much better chance of winning a championship, the success of sports franchises only tells part of MSG's story from an investment standpoint.

Back in mid-April, I spelled out my case for investing in MSG.

Since then, the stock popped 10.1%, moving up more than $3 to this past Friday's close of $37.94. During that session MSG touched an intraday, 52-week high of $38.38.

Before we consider the bull case for MSG, in light of last week's killer quarterly report, please allow me to get something off of my chest.

The company blew the door off of the quarter. Because MSG owns the Knicks, the media associated Jeremy Lin's fleeting stardom with the company's solid quarter. I have great respect for The Wall Street Journal (I subscribe and read it religiously), but it's nothing short of absurd that the newspaper would allow this headline to hit: Lin Boosts Madison Square Garden. And it was not the only one offering a thin assessment of MSG's earnings release.

As a long-term investor, I do not own MSG shares on the basis of Lin or even the mere presence of the Knicks and Rangers.

I am long because of synergy. MSG is a vertically integrated regional powerhouse: It owns the sports franchises. It owns the venues they play in. It owns the distribution channels for broadcasts of the teams it owns as well as others.

A bull case built on uncertain and short-term factors, such as Lin, is good for little more than a swing trade. It's irresponsible of the financial media to connect "Linsanity" with MSG's quarter. That approach makes for a decent story with mainstream mass appeal, but provides little, if anything, of value to investors.

Sifting through MSG's conference call, however, makes you a smarter and better-informed investor.

Over the course of the entire call, Lin's name came up twice, including just this one materially meaningful reference:
On the marketing partnership front, we have recently established new partnerships with Unilever, Blackberry, Tissot, (inaudible). The emergence of Jeremy Lin also created additional sponsored opportunities including a partnerships with Thailand based companies Acer and Maxis and a court side marketing campaign with Coca-Cola that include signage in Mandarin.

On the call, MSG CFO Robert Pollichino outlined why MSG's Sport segment was able to increase revenue by 37%, year-over-year:
The increase in revenues was primarily attributable to the financial benefits of the first phase of the Arena Transformation project and, to a lesser extent, a higher percentage of New York Knicks-related revenues being recognized during the quarter versus the prior year period as a result of the compressed NBA season.

As a financial writer, you have a choice to sensationalize the situation or to tell the actual story behind a catchy headline. I prefer to take the latter approach.

MSG is transforming the arena known as Madison Square Garden in phases. The second phase commences after the Knicks and Rangers playoff seasons end. Upgrades to The Garden focus on three levels of customers, ranging from Fortune 100 firms who access luxury suites to fans who sit in the "upper bowl."

In the most recent quarter, MSG saw food, beverage and merchandise revenue growth and profitability exceed expectations at all levels: fast food, VIP and suites. The company expects the second phase of transformation, to be complete for the next NBA and NHL regular seasons, to continue to drive the top and bottom lines.

At day's end, you're not long MSG because of Jeremy Lin or even because of the Rangers' excellent chances to play in the Eastern Conference Finals and the Stanley Cup. While Linsanity and the prospect of up to 14 more Rangers' playoff games (including up to 7 or 8 at home) certainly does not hurt, you buy MSG shares because of something much bigger, longer-term and more holistic.

MSG has all of the pieces in place to continue to grow as a media and entertainment juggernaut. Again, think cross- and multi-platform vertical integration. MSG owns and controls the content as well as the ways and means of delivering that content in-person and on television. The company collects revenue across the food chain (concessions, merchandise, ticket and suite sales, in-arena and television advertising, etc.) and serves its customers wherever they roam.

MSG has barely scratched the surface of its enormous potential. As President and CEO Hank Ratner noted on the call:
We do not have a TV Everywhere product right now. But obviously we look at that model and the larger remodels and how we distribute our content. And we certainly will consider everything including streaming products on authenticated basis. But, again, we're not rushing with that. So we really understand its full economic impact on our business and the rest of the business.
And when MSG does quantify that impact, it can leverage its properties via a whole new platform - online and mobile. That's good for additional revenue, particularly from advertisers, and, because it will require online and mobile subs to be traditional cable or satellite customers, the company only strengthens its relationships with the companies that shell out all-important affiliate fees.

Media is a great space to put your money. However, don't fall for gimmicks. Invest in the companies that control premium content, multi-million dollar franchises with loyal and rabid fans and the ability to leverage those assets to sustainable growth for years to come. MSG scores high on all counts. That not only makes it an excellent long-term investment, but an attractive takeover target for larger players ranging from Time Warner ( TWX) to Disney ( DIS).

I am long TWX. I am long MSG in a custodial account I manage for my minor child.

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