The guru’s Chicago-based firm invests in undervalued small and mid-cap companies that have sustainable competitive advantages, high barriers to entry and predictable fundamentals that allow for double-digit earnings growth. Rogers emphasizes that patience, independent thinking and a long-term outlook are necessary for generating good returns.
According to GuruFocus Real-Time Picks, a Premium feature, the firm invested in 1.16 million shares of the New York-based media company on Oct. 31. It now holds a total of 8.7 million shares, which represent approximately 1.77% of the equity portfolio. The stock traded for an average price of $16.21 per share.
GuruFocus estimates the firm has gained 16.2% on the investment since establishing it in the first quarter of 2011.
The company, which owns and operates regional sports and entertainment networks, has a $1.06 billion market cap; its shares were trading around $17.65 on Tuesday with a price-earnings ratio of 7.31 and a price-sales ratio of 1.86.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
In its third-quarter commentary, the Ariel Fund said MSG recorded an “acceleration of subscriber losses” among its cable, telecom and satellite video distributors during the three-month period ended Sept. 30. The stock, which had declined 21.79%, was also negatively impacted by a lower-than-expected multiple paid by the Sinclair Broadcast Group (SBGI, Financial) for the regional sports networks that were included in Walt Disney Co.’s (DIS, Financial) “forced sale of certain 21st Century Fox assets.” As such, the stock was trading at a 38% discount to the firm’s private market value estimate.
On Nov. 7, the company reported its first-quarter 2020 results. MSG recorded earnings of 57 cents per share on $161 million in revenue.
GuruFocus rated MSG Networks’ financial strength 4 out of 10. Despite having sufficient interest coverage, the cash-debt ratio of 0.32 indicates the company cannot cover its outstanding debt with cash on hand.
The company’s profitability fared much better, however, with a score of 8 out of 10. In addition to operating margin expansion, MSG is supported by strong returns that outperform a majority of competitors. It also has a moderate Piotroski F-Score of 5, which suggests business conditions are stable, a business predictability rank of one out of five stars that is on watch. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per annum over a 10-year period.
Of the gurus invested in MSG Networks, Rogers’ firm has the largest stake with 14.49% of outstanding shares. Other top guru shareholders are Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Hotchkis & Wiley, Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Chuck Royce (Trades, Portfolio).
Portfolio composition and performance
Ariel’s $7.96 billion equity portfolio, which is composed of 153 positions as of the end of the second quarter, is largely invested in the financial services space, followed by smaller positions in the consumer cyclical, technology and industrials sectors.
Other diversified media companies Rogers’ firm holds are The Interpublic Group of Companies Inc. (IPG, Financial), CBS Corp. (CBS, Financial), Viacom Inc. (VIAB, Financial), Omnicom Group Inc. (OMC, Financial), Meredith Corp. (MDP, Financial), Tegna Inc. (TGNA, Financial) and The Madison Square Garden Co. (MSG, Financial).
According to GuruFocus, the Ariel Fund returned -13.67% in 2018, underperforming the S&P 500 Index’s return of -4.38%.
Disclosure: No positions.
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