Has Madison Square Garden Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Madison Square Garden (Nasdaq: MSG  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Madison Square Garden.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 6.6% Fail
  1-Year Revenue Growth > 12% 8.1% Fail
Margins Gross Margin > 35% 44.4% Pass
  Net Margin > 15% 8.3% Fail
Balance Sheet Debt to Equity < 50% 0.3% Pass
  Current Ratio > 1.3 0.81 Fail
Opportunities Return on Equity > 15% 8.4% Fail
Valuation Normalized P/E < 20 29.27 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Madison Square Garden last year, the company hasn't managed to score any more points. Yet a 75% boost for its stock price has shareholders thinking they couldn't get much closer to perfection.

Madison Square Garden has gone through a tumultuous year. This time last year, the NBA lockout was in full force, and skeptics wondered if professional basketball would ever recover from the debacle. Yet just months later, the MSG-owned Knicks had the Jeremy Lin sensation, with Linsanity sweeping the league. With the Knicks making it into the playoffs and pushing the eventual champions to a deciding Game 5 in their opening series, excitement spread to the stock as well.

But like it or not, the health of Madison Square Garden rests more on broadcast rights than the actual success of its teams. As two deal show -- CBS' (NYSE: CBS  ) 14-year $10.8 billion deal with the NCAA back in 2010 to show March Madness and other college basketball programming, and Disney's (NYSE: DIS  ) $15.2 billion deal with the NFL to extend ESPN's Monday Night Football programming through 2021 -- the way teams negotiate media deals can make or break their bottom lines. And although revenue from non-owned third-party entertainment companies like World Wrestling Entertainment (NYSE: WWE  ) and concert-organizer Live Nation (NYSE: LYV  ) add important sources of revenue, TV is where the truly big-figure money is.

In its fiscal fourth quarter, Madison Square Garden beat sales and earnings expectations. With success both from the Knicks and hockey's New York Rangers, higher ticket sales pushed results up across the board. Yet with the specter of a disruption in the NHL this year, Madison Square Garden once more finds itself under threat.

For Madison Square Garden to improve, it needs to look for innovative ways to spur growth. Otherwise, the company will find itself a perennial also-ran in the race for perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Madison Square Garden may be far from perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's popular special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Madison Square Garden to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Walt Disney and Madison Square Garden. Motley Fool newsletter services have recommended buying shares of Walt Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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