With The Madison Square Garden Split Complete, Which Is The Better Stock To Invest In?

The former Madison Square Garden Company split into two separate units effective October 1, with Madison Square Garden (NYSE:MSG) being the live sports and entertainment side of the former company, and MSG Networks Inc (NYSE:MSGN) being the media side of the empire. Shareholders of the company prior to the split received one MSG share for each three shares they owned of the former Madison Square Garden Company, divided into class A and class B shares, as the former shares were.

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As a result of the share distribution, hedge funds in our database were set to be major shareholders of the streamlined MSG, as the former stock was a popular one among the funds in our database. 40 investors that we track held $1.49 billion of the former company’s shares, representing 23.50% of its outstanding shares at the time. Among them were Kenneth Mario Garschina’s Mason Capital Management and Mario Gabelli’s GAMCO Investors with 4.38 million shares and 2.80 million shares respectively.

We follow hedge funds like Mason Capital Management because our research has shown that their stock picks historically managed to generate alpha even though the filings are up to 45-days delayed. We used a 60-day delay in our back tests to be on the safe side and our research showed that the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Total Return Index by an average of 95 basis points per month between 1999 and 2012. After adjusting for risk, our calculations revealed that these stocks’ monthly alpha was 80 basis points. We have also been sharing and tracking the performance of these stocks since the end of August 2012, during which time they have returned 118%, outperforming the S&P 500 ETF by 60 percentage points (see more details here).

The question is, will those Madison Square Garden (NYSE:MSG) investors retain their stakes in the company or will they move them over to MSG Networks Inc (NYSE:MSGN) or out of the company entirely? Analysts appear split as to which of the new entities is the better investment. Jeffries was bullish on MSG but bearish on MSGN, rating the former as a ‘Buy’ and the latter at ‘Hold’, with $185 and $20 price targets respectively.

In addition to having strong balance sheet strength and an eye on building through acquisitions, Madison Square Garden (NYSE:MSG) has also earmarked $525 million towards share repurchases, which will further buoy the stock. On the other hand, MSGN has witnessed declining subscriber numbers, and Jeffries expects that to continue, though noting that there is a small potential advertising upside should the NBA’s New York Knicks perform better than their franchise-worst 17-65 record last year. Stifel Nicolaus had a similar perspective, rating MSG as a ‘Buy’ and MSGN as a ‘Hold’, noting in MSGN’s case that while the shares aren’t expensive based on expected 2016 earnings, that they have limited upside potential as margins are expected to shrink and subscribers decline.

On the other hand, both BTIG and Albert Fried have rated MSG Networks Inc (NYSE:MSGN) as a ‘Buy’. Albert Fried’s analyst Rich Tullo also made note of the terrible Knicks season and sees revenue tailwinds because of it, while expecting interest in the NHL’s New York Rangers and New York Islanders to remain stable, with each having strong teams that are expected to contend again this season. MSGN also provides coverage of the NHL’s Buffalo Sabres and New Jersey Devils, as well as MLS’s New York Red Bulls. Despite headwinds in the form of rising media rights payments, Tullo set a $28 price target on the stock, upside potential of over 45%.

The former Madison Square Garden Company reported its fiscal fourth quarter and full year 2015 results on August 20, delivering $387.9 million in revenue for the quarter, with the sports and entertainment divisions responsible for $254.8 million, while the media side pulled in $153.2 million in revenue. While revenue was lower, the media side pulled down more than twice as much income at $77.6 million, while the sports and entertainment divisions generated $34.1 million in income. However, revenue and income both decreased year-over-year on the media side, while making gains in each category on the sports and entertainment sides. For the full 2015 fiscal year ended June 30, the former Madison Square Garden Company had revenue of $1.62 billion and net income of $254.70 million.

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