Madison Square Garden Entertainment: Strong Visibility Into Growth

Overview

My recommendation for Madison Square Garden Entertainment (NYSE:MSGE) is a buy rating, as I have become more confident in the MSGE growth outlook, especially with the strong visibility through FY24 and FY25. Note that I previously issued a buy rating for MSGE as I expected performance to be in line with guidance, supported by strong secular tailwinds and friendly capital return policies.

Recent results and updates

MSGE’s share price has rallied strongly after my post in October’23, from ~$34 to the current $40 (my share price target was $40.80), which I think is driven by the strong operating performance so far. In the recently reported result for 2Q24, MSGE reported revenue of $403 million, beating consensus expectations of $385 million, representing a growth of 13%. The strong growth was driven by an increase in the number of concerts held at the company’s venues compared to 2Q23 and higher per-event revenues. MSGE also reported a strong adj. EBIT performance of $151 million, driven primarily by strong revenue growth.

This strong set of performances validated my view that MSGE can achieve my FY24 estimates and potentially outperform them. In the near term, I believe MSGE remains on track to deliver a low double-digit percentage increase in booking events in FY24, and my confidence comes from the fact that management has complete visibility into its upcoming original concert bookings and mentioned that they expect to exceed it. Including The Garden, which is expected to set a new yearly record for concert bookings in FY24, four out of five of its venues are on pace to surpass initial expectations for concerts this year. This led management to restate their expectation that FY24 bookings will grow by a low double-digit percentage, which is very strong guidance considering that FY23 saw strong bookings with the help of rescheduled concerts caused by the pandemic. Management has already noted that, compared to 2Q23, concert bookings for 1H25 at The Garden are ahead by a fairly strong double-digit percentage; this trend persists even when looking farther ahead into FY25.

Let me start by saying our visibility is solid for the balance of the fiscal year. And beginning with concerts, as I mentioned earlier, four of our venues are on track to exceed our initial expectations for concerts this year, and that includes The Garden, where we’re on track to set a new record for the number of concerts on a full year basis.

That being said, our visibility is beginning to build for the first half of fiscal ’25 at The Garden. And I’m pleased to say that we’re currently pacing ahead by a fairly strong double-digit percentage in terms of the number of concerts for the first half of fiscal ’25 at the arena versus where we were same time last year. 2Q24 call

The risk of translating those bookings into revenue is that underlying demand might fail to materialize (i.e., a concert being cancelled, etc.). However, underlying demand strength has proven to be strong. For example, consider the Christmas Spectacular’s record-breaking FY24 run, which raked in $149 million in revenue. With over 1 million tickets sold, demand appears to have recovered, as it is at the same level as before the COVID-19 pandemic, and with 193 performances, the show surpassed internal expectations of 185. Additionally, the demand strength was not caused by sales or discounts; MSGE witnessed strong demand from both group and individual ticket sales, with average per-show revenue increasing by mid-single digits compared to 2Q23. This growth was fueled by higher ticket prices, higher sell-through, and higher ancillary spending on food and beverage. Aside from this specific instance, management also brought attention to the fact that concert ticket sales in 2H24 are up by a double-digit percentage compared to 2H23 on the earnings call. Several of its venues had sold-out multi-night runs, and several artists saw enough demand to justify adding extra shows. A strong 2Q24 was also experienced by family shows, despite the fact that this category lags behind others in terms of post-pandemic recovery.

In terms of capital returns, shareholders should be happy that MSGE has paid down the remaining balance of its revolving credit facility, which it had drawn upon in September to facilitate share repurchases. While this led to no share repurchases in the quarter, I think having a clean balance sheet makes it easier for MSGE to utilize its free cash flow [FCF] for more aggressive buybacks in the future. To reiterate, MSGE has a good track record of returning capital to shareholders, and since the completion of the spin-off in April, MSGE has reduced its Class A shares outstanding by ~10%, and MSGE has $110 million remaining under its current buyback authorization.

Valuation and risk

According to my model, MSGE is valued at $51, representing a 28% increase. This target price is based on my growth forecast of 10% over the next two years. The rationale for the increase in growth expectations is because of the strong growth seen in 2Q24 and the high visibility into FY24/25 performance (as per management). I have also revised my FY24 margin expectations given the stronger-than-expected revenue performance to 19% (the updated guide). This gives me more confidence that we should see a margin expansion of 21% in FY25 as revenue grows faster than I originally expected. I think the comment on strong visibility and performance has convinced the market to value MSGE at a higher-than-average forward EBITDA multiple (14x), and multiples should continue to stay at this level if MSGE can deliver as guided over the coming quarters.

Risk

The main optimism embedded in MSGE stock today is the strong visibility, backed by the strong demand environment. However, demand could soften if global economic conditions get worse. There are multiple trigger points that could lead to this: Russia/Ukraine conflict, China/Taiwan potential conflict, Red Sea conflict, etc. All of these could easily snowball into a global conflict, leading to major supply shocks (like that one that was seen during COVID), which leads to a major slowdown in economic activity, which impacts consumers income at the consumption level.

Summary

Summarizing this post, the recommendation for MSGE is a buy. The strong performance in 2Q24 and the high visibility into FY24 and FY25 bookings solidify my confidence in the company’s growth outlook. The double-digit booking increase expected in FY24 and the strong start to FY25 bookings at The Garden are particularly encouraging. This, combined with the healthy demand environment and improving margins, justifies MSGE to trade at a premium valuation in my view.