Taking Stock of Jeremy Lin’s Value

Madison Square GardenThe New York Knicks face a slew of questions heading into the 2012-13 season, now that Jeremy Lin’s bolted for the Houston Rockets. How will the Knicks’ rebuilt backcourt fare with Raymond Felton and Jason Kidd in the fold? Can Carmelo Anthony and Amar’e Stoudemire stay injury-free and productive all year long? And if we’re talking intangibles, can the Knicks recapture New Yorkers’ hearts and minds now that Linsanity is no more?

You can add one more question to the pile: How will parent company Madison Square Garden Company’s stock fare with Lin out of the picture? The answer is, it’s complicated.

To understand Lin’s impact on MSG, we should start at the beginning, when Jeremy Lin–related portmanteaux hadn’t been invented yet. On Friday, February 3, the Knicks traveled to Boston, having lost 10 of their past 12 games. They ran up 55 points and a six-point lead by halftime. Then the Celtics’ defense tightened and the Knicks’ offense fell to pieces: New York scored just 34 second-half points, the Celtics came away with a 91-89 win, and the Knicks dropped to a season-worst 8-15 record. They didn’t have time to ponder the loss, with a game the next day back in New York against the Nets. The losses were mounting, the team looked listless, and the Knicks didn’t have a true point guard on the court, with Baron Davis out and rookie Iman Shumpert showing flashes of strong play but not providing the spark the team needed. Twelve days earlier, the Knicks had called up Lin from the D-League. Then-coach Mike D’Antoni joked that if Lin ever got significant minutes in a game, that would mean the team was in big trouble.

Lin did get significant minutes against the Nets. In fact, he played more than any other Knick, dropped a career-high 25 points, dished out seven assists, and powered New York to a 99-92 win. For one night, Knicks fans were delirious.

Investors weren’t impressed at first. MSG’s stock edged up a modest 0.2 percent on the Monday following Lin’s breakout game. This was a normal fluctuation for a stock with a market cap of about $2 billion. Not that you would have expected much of a move either way. MSG is a multifaceted company consisting of three divisions: MSG Media runs the team’s cable TV channels, including regional sports network MSG Network, MSG Entertainment runs Madison Square Garden and several other venues, and MSG Sports runs several sports teams, including the New York Rangers, the WNBA’s New York Liberty, and the Knicks. A D-League call-up going off in a random game against a terrible team like the Nets, in the midst of what looked like a lost season at the Garden, wouldn’t figure to make any difference one way or another. The company was doing more than $1 billion in annual revenue; Jeremy Lin wasn’t going to change that.

Except things were about to get crazy. Following the win over the Nets, the Knicks reeled off another six in a row, with Lin suddenly transformed into the team’s most indispensable player. He went for 28 and eight against the Jazz at MSG on February 6, then 23 and 10 on the road against the Wizards February 8. And then there was the game. Back at MSG on February 10, the Knicks took on the Lakers, with a national ESPN TV audience looking on. Lin went bonkers. His 38-point explosion is a joy to watch even now on YouTube. But if you followed the game that night on Twitter, you’d have witnessed a frenzy that rivaled some of the biggest in the social media site’s history. If you were actually at the Garden that night, you might’ve had an out-of-body experience. Every highlight show, every newspaper headline, every breakdown of poor Derek Fisher getting annihilated again and again revolved around Linsanity, which was now in full swing.

This time, the stock market took notice. When interest surges in a stock, that can cause demand to overwhelm supply. If that kind of surge occurs before the market’s opening bell, you get what’s called a gap-up. In that scenario, the stock jumps right when the market opens, such that when you look at its daily chart, you see white space — a gap between the closing price of the previous day and the opening price of the next day. MSG’s stock closed at $31.15 on February 10, the day Lin smoked the Lakers. The next day, it opened at $31.41, rose as high as $33.18, and closed at $32.32, up 1.2 percent. For a high-flying tech stock coming off monster earnings or a big new product announcement, that’s small beer. For a relatively slow-moving media company’s stock, one favored by value investors as a safe staple in a diversified portfolio, this was notable. Throw in the fact that MSG reported no major news of any kind that day, and it was a big deal. Jeremy Lin had moved the market, more or less by himself.

“These things are really hard to quantify,” said John Tinker, an equity analyst who covers MSG for New York–based banking, securities, and investment management company Maxim Group. “You don’t make a lot of money on the team, but you can on the TV side, with ratings. When Lin turned up, the team actually started winning, and in spectacular fashion. Ratings really started going up. Suddenly the Knicks were becoming part of the conversation, not just here in the U.S., but the international conversation. When was the last time that happened?”

The Knicks had been dealing with a ratings-related problem for weeks by that point. Starting at the beginning of the year, Time Warner Cable had blocked MSG Network from its airwaves. It made sense from Time Warner’s perspective. Time Warner was a massive cable provider with a market cap more than 10 times bigger than MSG and its comparably small regional sports network subsidiary. MSG sought a rate hike for its programming. Time Warner knew it represented about 20 percent of MSG’s potential audience. MSG seemed to have little or no leverage in the dispute.

Until Linsanity came along. TV ratings for Lin’s first four starts soared 52 percent. MSG reported a 223 percent spike in traffic to its website, and more than 50,000 downloads of mobile applications in the two weeks since that product’s launch. According to Time Warner, MSG was now demanding a 53 percent rate hike for its programming, up from a 6.5 percent demand in December. As Lin and the Knicks continued to flourish — 20 and 8 in a February 11 win over the TWolves, 27 and 11 in a Valentine’s Day win over the Raptors (including this buzzer-beater that sent half of Canada into hysterics), 10 and 13 back home against the Kings — the pressure on Time Warner to settle, both financially and politically, skyrocketed. Hours before the Knicks were due to take on the Hornets on February 17, the two sides settled. Though terms were not disclosed, the implications for MSG were clear: The network would add 20 percent more households, escalating ratings would fuel higher advertising rates, and revenue and earnings could take off. MSG’s stock climbed 1 percent on the day of the settlement, then another 0.6 percent when the market reopened after the holiday weekend. Tinker raised his price target on the stock, and several other analysts wrote encouraging notes on the stock’s future outlook.

“MSG’s victory suggests that live sports programming is still essential, in our opinion,” Tinker wrote in his February 21 note. “Knicks ratings are up 69% season to date … compared to the first 26 games on MSG Network last year (primarily due to Lin-Mania, in our opinion).”

It was a heady climb from there. From February 3 (the day before Lin’s first game) to May 7 (two days before the Knicks got eliminated from the playoffs by the Miami Heat), MSG’s stock shot up 32 percent. On May 4, MSG reported a 60 percent boom in quarterly earnings, with revenue up 21 percent. Though Lin got hurt late in the year, the Knicks still cracked the postseason and held the city’s interest until their ultimate defeat. Lin’s playoff absence notwithstanding, the broader implication was clear: As Jeremy Lin goes, so go the fortunes of the Madison Square Garden Company.

To which we say … yes, and no.

MSG’s ratings certainly soared once Linsanity hit fever pitch. That surge helped MSG Network break its deadlock with Time Warner, which unlocked revenue streams that were in jeopardy as long as the dispute raged on. Stocks tend to respond to news that bodes well for a company’s top and bottom line.

But MSG had other factors working in its favor too. An extensive renovation project upgraded the Garden, adding new, lower-level suites and clubs, with prices rising as much as 40 percent on some luxury boxes. The Knicks had already experienced a spike in ratings when Carmelo Anthony arrived a year earlier; had a healthy Anthony, Stoudemire, & Co. led the Knicks to the playoffs without Lin, it’s likely that more and more fans would’ve flicked on their TVs anyway, even if the ratings spike probably wouldn’t have been quite so big. While all this was happening, the New York Rangers were in the midst of an even more successful season, racking up the best record in the NHL’s Eastern Conference and setting up as a favorite to win the Stanley Cup (before eventually exiting early from the playoffs). More broadly, MSG was already a successful stock before Lin came around. It ramped up 39 percent from its low the week ending October 7, 2011, to its closing price the day before Lin’s breakout game, a time frame dovetailing very closely with the start of the Rangers’ regular season and the completion of the Garden’s renovations. Jeremy Lin played a big role in MSG’s rise, but he wasn’t alone.

In the past two weeks, as news spread over Lin’s contract negotiations and ended with Lin leaving for Houston, MSG’s stock has fallen 9.3 percent. Simple cause and effect, right? Again, yes and no. For one thing, the headlines haven’t always matched up with the stock’s moves. On July 2, news broke that Lin might not return to New York, if other suitors were to offer him a back-loaded contract that threatened to detonate the Knicks’ cap situation three years down the road. Yet the stock actually motored 1.4 percent that day. In technical terms, you could call that move a breakout: MSG’s stock had drifted slightly lower for eight weeks, marking the kind of consolidation that can often portend a big jump in price to new 52-week highs. The stock did in fact hit a new high the next day. But after a big move in the morning, it closed up just 0.1 percent for the day, bearish action at such a crucial juncture. Turns out that potential breakout on July 2 came in below-average volume. In layman’s terms, that means the big mutual funds and other institutional investors who normally drive stocks and the overall market higher weren’t buying, with the action instead coming from regular shlubs like you and me. When a breakout occurs under those circumstances, a stock’s move is almost always doomed to fail, Jeremy Lin or not.

There’s one other no-duh factor in play here. The Garden’s now more or less dark for the summer. Granted, the Knicks’ and Rangers’ seasons ended a couple months ago. But investors’ reactions don’t always sync perfectly with the timing of key events (or non-events). Between a quiet Garden and MSG Network making do with less lucrative programming until the fall, a seasonal pullback in MSG’s stock price was likely to happen anyway — even if Lin’s departure opens the possibility of a steeper pullback than you might normally expect.

Next season could tell us a lot about the merits of the Lin decision, says Tinker. If the Knicks start the season hot out of the gate, ratings might jump again, and the decision to avoid a future gigantic balloon payment on Lin might look prescient. But with the Nets moving into Brooklyn’s new Barclays Center in the fall, the Knicks won’t be the only game in town, which could call into question the near-term financial upside of the Knicks — and, by extension, MSG.

“One of the things that makes the Garden so attractive is that high exclusivity factor, that it’s the only stadium in Manhattan,” Tinker says. “But now you’ve got a serious stadium bringing in serious money in Brooklyn, which is what, the fourth- or fifth-biggest city in the country? There will be competition.”

Filed Under: Jeremy Lin, New York Knicks

Jonah Keri is a staff writer for Grantland. His book The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team From Worst to First is a New York Times best seller. The paperback edition of his new book, Up, Up, and Away, on the history of the Montreal Expos, is now available.

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