Like Knicks Fans, MSG Networks Investors Get Easily Riled Up

(Bloomberg) -- Wall Street has begun to question the logic driving frequent swings in shares of Madison Square Garden Co. and its affiliated TV network.

Fan and investor sentiment often triggers a knee-jerk reaction in the stocks, whether it's about the New York Knicks' record, free agency prospects, advertising, attendance and viewership, or even potential picks for the National Basketball Association's draft lottery.

A marginal move in the shares based on what Madison Square Garden chief executive officer James Dolan and the Knicks do on and off the court “comes and goes,” Evercore ISI analyst David Joyce said in an interview. But when there are sharp sell-offs as emotions overpower logic on short-sighted headlines, other investors can “take advantage of that when they realize it's a franchise that's not going away.”

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Volume in MSG Networks Inc. shares has been elevated every time the Knicks -- or even a potential free agent target -- have been in the news. Three of the heaviest trading sessions in the last two months coincided with updates for what could have been. Investors positioned around a potential shot to draft Zion Williamson, then the NBA Finals game when superstar Kevin Durant went down with an Achilles injury, and when the team's free agency hopes went up in flames.

Declining ratings for TV networks and a number of other moving parts contribute to what molds the media asset, which was speculated to be a takeover target for billionaire John Malone earlier in the year. The combination of news and events has led to MSG Networks' underperformance so far this year with the stock down roughly 12%, compared to an 19% climb for the S&P 500 Index and a 5.6% gain in Madison Square Garden shares.

While adding a pair of NBA All-Stars would have helped MSG Networks stabilize a decline in ratings, “at the end of the day, it's about the team's performance,” BTIG LLC analyst Brandon Ross said. Even so, management's focus on short-term, lower-cost deals may portend well for the future as the NBA landscape continues to shift, he said.

For investors in Madison Square Garden, its location in a high-traffic tourism area of New York City makes it “recession-resilient,” Evercore's Joyce said. The arena tends to be near sell-out capacity for Knicks and Rangers hockey games “no matter how the teams are doing because there's a unique entertainment aspect.”

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While the Rangers ended the 2019 season among the league's bottom-feeders and the Knicks finished with an NBA-low 17 wins, a better-equipped team that could bring back playoff basketball would obviously be well received. “But those are just marginal ebbs and flows, because the majority of the valuation is based on the venue and its location,” Joyce said.

To contact the reporters on this story: Bailey Lipschultz in New York at blipschultz@bloomberg.net;Kamaron Leach in New York at kleach6@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Morwenna Coniam

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