MSGS: Own The Knicks & Rangers

By Shawn O'Malley · January 5, 2025

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Welcome to the first-ever edition of The Intrinsic Value Newsletter! If you’ve been a reader of We Study Markets, things have changed a bit, but we’re as committed as ever to delivering high-quality financial information to you.

Every week, here and on the sister podcast, I’ll break down a different company's business model, estimate its intrinsic value, and decide whether it should be added to The Intrinsic Value Portfolio—a portfolio of stocks we’ll build together over time.

So today, I'll go through the thesis for Madison Square Garden Sports Corp. (MSGS), the publicly traded holding company that owns the New York Knicks and Rangers.

More below 👇

— Shawn

MSGS: Own The Knicks & Rangers

As mentioned, Madison Square Garden Sports Corp. (MSGS) is a vehicle for owning the NBA’s New York Knicks and the NHL’s New York Rangers.

The thesis is pretty straightforward: Forbes has an excellent track record in estimating the valuations for professional sports teams, and they currently estimate that, combined, the Knicks and Rangers are worth $11 billion ($7.5b for the Knicks, $3.5b for the Rangers.)

At this valuation, you’re, in theory, getting the Rangers entirely for free and a discount on the Knicks. At the time of writing, MSGS trades at a $5.4b equity value and $6.3b enterprise value, which is obviously a considerable discount from what Forbes estimates. And, on average, Forbes ends up typically being a bit conservative in their estimates, too (from 2021 to 2023, 15 teams in major U.S. sports leagues sold partial or full ownership stakes that were, on average, at a 17% premium to Forbes’ valuations — see below.)

Meanwhile, the Knicks have compounded their Forbes valuation at 20% per year for 15 years, while the Rangers have compounded at 9% per year over that same period.

More Than The Numbers

In short, MSGS is a rare opportunity to invest in two premier sports franchises in public markets, of which the two franchises potentially trade for 50-60% of their net asset value.

And that’s before accounting for the decent chance that they’ll continue to compound their value at double-digit rates going forward as they have in the past decade and a half — sports teams are the ultimate crown jewel for billionaires, and there are more billionaires than ever to bid on them, while there is only a fixed supply of franchises in the U.S.’s four major sports leagues.

Billionaire wealth has rocketed in recent years, giving them more spending power to use toward trophy assets like sports teams.

There’s a considerable non-economic and egotistical component to buying sports teams. They’re a luxury good for billionaires and the pride and joy of entire major cities. They also elevate billionaires’ status. Jerry Jones and Marc Cuban wouldn’t be household names if it weren’t for their ownership of the Cowboys and Mavericks.

Additionally, there are some very real tax-shelter benefits for buying teams known as the Roster Depreciation Allowance (RDA.)

With the RDA, there’s essentially a double-tax benefit, where not only can MSGS deduct the actual salary costs for players from its income, but it can also amortize the intangible value of its players as “roster assets,” further reducing the income that’s reported to the IRS and saving the company on taxes.

The double benefit arises because, under the RDA, owners amortize the purchase price of the team, player contracts, and other intangible assets like TV contracts and franchise rights over a 15-year span, on top of actual payroll expenses.

This partially explains why sports franchises are such attractive purchases to billionaires. They can effectively be used as a tax shelter, where teams may be cash-flow profitable but can report considerable paper losses that reduce tax liabilities.

When David Tepper paid $2.3 billion for the Carolina Panthers, that produced amortization expenses of around $140 million per year, more than wiping out any of the Panthers’ profits reported for tax purposes.

Why The Discount?

For starters, this is probably a classic sum-of-the-parts value trap. Short of the Dolan family, which controls...