Morgan Stanley analyst Benjamin Swinburne reiterated his Outperform rating on Madison Square Garden (MSG) today, raising his target price by $7 to $43, nearly 15% upside from the stock’s current levels.
In a note, Swinburne said that the move was due to stronger affiliate revenue in the second quarter, which to him suggests that the Time Warner Cable (TWX) renewal in mid-February garnered higher than expected pricing. He notes that overall, he still remains “above consensus and continue to see MSG growing its EBITDA ~20% annually from FY11-14.
Read highlights from his note below:
Above consensus on affiliate revenue growth at MSG, and our estimates appear conservative: We are raising our FY13 Media rev forecast by ~$40M (+6%), primarily on higher affiliate fees following the TWC renewal. While MSG�s negotiation did not come without risk, the ultimate result supports our bullish view of MSG�s strategic position as an owner of high-value sports content. As we extrapolate from F3Q affiliate fees, we are well above consensus for Media FY13 rev ($689M est. vs. ~$650M consensus). Furthermore, we see upside to our forecast of 5% per sub affiliate fee growth in FY13+ (ex-TWC), as our analysis of past affiliate fee growth (adj. for carriage renewals/drops) suggests a double digit underlying affiliate fee CAGR in CY09-11.
However, top line growth to be partly reinvested: While we are bullish on MSG�s top line (and therefore LT earnings power), investors should expect near-term reinvestment in the business, primarily at cable network Fuse but also at the LA Forum. We now assume a $30M / $15-20M YoY step-up in Fuse programming / marketing respectively in CY12.
Valuation: We are raising our PT on higher affiliate rev growth estimates, which ultimately drive higher FCF. Our PT implies a post-renovation CY14 EV/ EBITDA multiple of ~10x vs. our prior PT fwd. multiple of ~8.5x
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