Bill Gates (Trades, Portfolio) is a co-founder of Microsoft Corp. (MSFT, Financial) and one of the richest men on the planet. He is also considered one of the smartest billionaires, combining intelligence with ethics when investing. While the Bill and Melinda Gates Foundation's trust is overseen by a team of portfolio managers, Gates votes on certain elements of the investments and sets the vision for the foundation.
Since the equity portfolio only contains 20 stocks, each investment should be seen as significant. As such, I will take a closer look at his latest purchase of Madison Square Garden Sports Corp. (MSGS, Financial).
Gates Foundation buys the Garden
Madison Square Garden is known as "The World's Most Famous Arena.” The company spun off its entertainment business in 2020, which now trades under the ticker "MSGE." The foundation was buying the sports side of the business, which trades under "MSGS." The company owns a variety of sports teams and related brand assets, which include the New York Knicks NBA basketball team and the New York Rangers, which is part of the National Hockey League.
The company also owns two development league teams, the Westchester Knicks (NBAGL) and the Hartford Wolf Pack (AHL), in addition to esports teams via Counter Logic Gaming and Knicks Gaming, a league franchise. Madison Square Garden also owns two sports performance centers, the MSG training center in Greenburgh, New York and the CLG Performance Center in Los Angeles.
For the second quarter, 13F filings show the foundation more than doubled its position in Madison Square Garden Sports. The stock traded at an average price of $162 per share during the quarter, which is approximately 5% lower than where it traded at the time of writing.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Strong financials
Madison Square Garden Sports generated record revenue of $175.2 million for the three months ended June 30, which beat analysts' expectations by $81.72 million and increased 19% year over year. This growth was driven by strong playoff revenue of $49.6 million as the Rangers played 10 home playoff games. Season ticket revenue increased $27 million, with suite license fee revenue of $13.6 million. Food, beverage and merchandise sales popped by $3.5 million. This growth was driven by the removal of attendance restrictions, which benefited the sales of tickets and products.
According to CEO Andrew Lustgarten, “We continued to see significant demand for the Knicks and Rangers from our fans and corporate partners, which drove record-high financial results for our Company.”
The company partnered with MSG Entertainment (MSGE, Financial), which helped it to provide premium hospitality offerings to guests, giving them a once-in-a-lifetime experience. This resulted in strong suite renewal rates for Knicks and Rangers games, which were higher than pre-pandemic levels.
League distribution revenue declined by $39.7 million and local media rights fees decreased by $21.7 million. This was a result of a slight shortening of the NBA and NHL seasons, resulting in 11 fewer home games. A $21 million NHL expansion fee also had a negative effect on revenue.
Despite the headwinds, direct operating expenses of $92.9 million declined 6%, or $6.1 million, year over year, which was a positive sign. However, this was driven by the aforementioned shortening of the sports season and caused personnel compensation to decline by $35 million.
Overall selling, general and administrative expenses were $57.4 million, which decreased by $10.6 million, or 16%, compared to the same period last year.
Operating income was $23.7 million, which increased by $44.5 million from the operating loss recorded in the prior-year quarter.
Earnings per share popped by $1.77 to $1.11 from negative earnings generated a year ago.
Madison Square Garden has a solid balance sheet with $91 million in cash and short-term investments and $220 million in long-term debt, which is manageable given the strong operating income.
Valuation
Madison Square Garden Sports trades with a price-sales ratio of 5.05, which is 25% cheaper than its five-year average.
Based on historical ratios, past financial performance and analysts' future earnings projections, the GF Value Line also indicates a fair value of $264 per share, which means the stock is significantly undervalued at the time of writing. However, GuruFocus does warn of a possible value trap, which is perhaps due to the borderline profitability last year. However, I do not believe this is a major issue given the purchase by the Gates Foundation.
Final thoughts
Madison Square Garden Sports is a solid company with an industry-leading brand and a strong experience offering. Sports and events have had a vigorous rebound since the pandemic, which has caused a major boost for the company.
The stock is undervalued relative to historic multiples, so it is not a surprise to see the Gates Foundation loading up on the stock.
