Hot Stock: Madison Square Garden

Earnings and playoff hopes rise.

While thousands of hockey fans across North America will be tuned to their TV sets tonight to catch the first games of the 2013 NHL playoffs, they won’t be the only ones watching to see how the post-season plays out. Investors in Madison Square Garden (NASDAQ: MSG), the home of the New York Rangers and the New York Knicks, will be eagerly tuning in as well.

The better the Rangers and Knicks do—both teams are in their leagues’ playoffs—the more money the company makes. It’s thanks in part to these extra games that a number of analysts have buy ratings on the stock. In an April 29 report, Amy Yong, an analyst at Macquarie Equities Research, increased the number of Knicks home games that will be played in the fourth quarter, which is now underway, from four to eight and she increased the number of Rangers games played from four to six.

David Miller, an analyst with B. Riley & Co., points out that these additional games should increase earnings in Q4. If the Knicks and Rangers only play the minimum number of playoff games, revenues will climb from an estimated $290 million to $323 million, while earnings per share growth will jump from an estimated $0.23 to $0.27. If either team plays any extra matches, those revenues will climb even higher.

Before investors can worry too much about Q4 though, they have to get through Q3’s results, which will be announced on May 3. Miller thinks that the company can meet his revenue projection of $403 million and $70 million in adjusted operating cash flow (AOCF). He also expects to see EPS come in at $0.32, which is right around consensus estimates.

Yong thinks MSG’s media segment—it owns three television stations, two of them broadcast the Knicks and Rangers plus hockey’s Buffalo Sabres, New Jersey Devils and the New York Islanders games—will grow revenues by 9% year-over-year in Q3, thanks to a 17% increase in affiliate revenue. She also expects its entertainment division—MSG also owns Radio City Music Hall, The Beacon Theatre and other properties—to grow by 6% year-over-year. However, due to flat sports revenues, she predicts we’ll see EPS of $0.25, which is lower than the $0.39 EPS in Q3 2012.

Still, Yong thinks the company is a good buy going forward. Madison Square Garden is opening a number of luxury suites in Q2 2014, which will reportedly sell for about $600,000 per suite or 50% higher than what she had estimated.

Credit Suisse, which on April 29 initiated an outperform rating on the stock, thinks it will benefit from a rising demand for more sports content. In a note, analyst Michael Senno wrote that “as an owner of sports cable networks and teams, we believe that MSG is well positioned to capitalize on the increasing value of premium sports content, which should result in AOCF and free cash flow growth above its peers and, combined with incremental leverage, lead to solid shareholder returns.”

MSG’s stock price is currently at $59, but Senno has a 12-month price target of $68. Miller and Fong have $67 and $65 price targets, respectively, while others think it could hit $70.

For more investing insights, follow Bryan on Twitter @bborzyko.