Invest in MSG? That's pure 'Linsanity'

Jeremy Lin's meteoric rise as a player is making MSG a hot stock. Don't get burned.

By InvestorPlace Feb 14, 2012 10:55AM

By Kyle Woodley


Sports phenomena rock the mainstream media all the time. The stories surrounding athletes like Tim Tebow and LeBron James are larger than life, so when they hit the traditional news outlets and plaster social media, no one bats an eye.


But when a sports phenomenon -- in this case, one dubbed "Linsanity" -- causes a major move in a well-known stock, it's time to step back and take a breather.


Shares of Madison Square Garden (MSG) -- which owns the Garden, manages the sports franchises it hosts and operates several cable TV channels -- recently have hit an all-time high since the company's spin-off from Cablevision (CVC) in 2010. And much of the gain is being attributed to the rise of New York Knicks guard Jeremy Lin.


While Lin has been the electric catalyst for a captivating five-game win streak that has put the Knicks into the young season's playoff picture, it's time to put this investing fairytale story to bed. Here's why:


The basketball side

Jeremy Lin is as good as sports stories get: He's an Asian-American point guard who went undrafted after a great basketball career at Harvard, then got picked up and cut by two NBA teams. Lin was signed by New York in late December 2011 as a bench player, and reportedly was close to being cut.


He then scored 25 points in his first game seeing significant time, which kicked off a five-game Knicks' win streak in which Lin averaged 27 points and 8 assists. He's the toast of the media, "Linsanity" is now in most NBA fans' vernacular and Lin's #17 is the hottest-selling NBA jersey online.


Move over, The Blind Side.


The reality check isn't completely crushing. Lin's continued prospects as a starter look good, considering the Knicks don't have too many other options.


The big question mark is Knicks star forward Carmelo Anthony, who could return as soon as Tuesday after missing the past couple weeks -– and the win streak -- with a groin injury. Many worry that the team's play under Lin, which has been fast-paced and fluid, will suffer with the reinsertion of Anthony, a phenomenal scorer, but one whom many also consider to be a tempo-wrecking ball-hog. Any hopes of a Knicks playoff run now seem to weigh on whether these two can play well together.


Of course, the biggest question mark is Lin himself. There's nothing saying Lin's hot streak won't mark the beginning of a long, successful basketball career. There's also nothing saying that it will. Just as basketball is a game of runs, many of its players are prone to streaks, but the best players are the most consistent over time -- and five games is a microscopic data set.


Though perhaps the best dose of reality comes from Pulitzer Prize-winning sports author Buzz Bissinger, who, in an analysis of the hype surrounding Lin, points to a flameout within the same state: Buffalo Bills quarterback Ryan Fitzpatrick.


The business side

Lin's blood is powerful. As the first American-born pro basketball player of Chinese or Taiwanese descent, a successful career means he could be a key draw in the increasingly important Chinese market, where NBA viewership continues to rise. According to the Associated Press, a 21-game schedule during the Chinese New Year drew 96 million viewers, and live NBA broadcasts on Chinese sports station CCTV5 are up 39% from last year. China also is a big buyer of NBA player jerseys, with Kobe Bryant being the most popular replica gear for years.


Still, in the near term, nothing's certain, not the least being the Knicks' playoff hopes. The team currently holds the eighth and final Eastern Conference playoff spot -- but at a record of 13-15, with almost 40 games to go. So, the longer-term financial benefits of a winning (and playoff-bound) team, such as increased viewership and new ad opportunities, still look like a total gamble.


And you'll be paying a premium to make that gamble. Thanks to the recent run-up, MSG shares currently trade for more than 30 times earnings and approximately 25 times forward earnings -- decidedly more than its media peers.


Meanwhile, MSG's most recent quarterly report wasn't encouraging, even though it beat expectations: Profits dropped 22% and revenues fell 14%.


Now, the quarter could be considered an outlier. After all, Madison Square Garden lost 16 games to the NBA strike during the period. And MSG now has plenty of NBA security, with the labor agreement struck in December 2011 set to last 10 years. However, another potential labor strike looms over Madison Square Garden -- this time with its New York Rangers. The current National Hockey League collective bargaining agreement expires Sept. 15, with no option for extension. And while the NHL is far from the NBA in prominence, the Rangers remain one of the league's most popular teams and a perennial playoff (read: extra revenues) threat.


Madison Square Garden, like the Knicks, has plenty of upside. If all the chips fall correctly, MSG could end up with an international superstar, a franchise revival and a smooth transition from one NHL labor deal to the next. But the stock's price (up 3.7% on Monday to $32.32) isn't right for the privilege of shouldering all those "ifs" -- and certainly not as a route for jumping on an unknown player's bandwagon. If you're not already playing MSG, leave it on the bench.


Or, if you still want to cash in on the Big Apple, you can shoot for another New York favorite when the Empire State Building files for an IPO that could raise $1 billion.


Kyle Woodley is the assistant editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.


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