MSG Networks Deleveraging Is Working

MSG Networks IncMSGNDavid MillerMSG Networks' stock from Hold to Buy with a price target boosted from $19 to $25 (see his track record here). As part of the split, which created MSGN and Madison Square Garden Co MSG, MSGN leverages up to $1.55 billion, or 4.5x TTM AOI, Miller explained in his upgrade note. Also, most of the cash was transferred to MSG, the business model of which was focused only on the live experience and is little concerned with cord cutting. On the other hand, the broadcast network was "left saddled with debt" and is seeing a subscriber base decline of 2.0 to 2.5 percent per year.

But now an over-the-top deal is very likely to be coming soon which could change the narrative, Miller suggested. As such, now may be the time for investors to become constructive on the stock as the company's financials are set to notably improve.

By the end of the next earnings season, MSGN's leverage metric will likely improve to at 3.39x TTM AIO, mostly due to the $178.5 million in free cash flow generated in fiscal 2016 and $192.3 million in free cash flow generated in fiscal 2017. This metric is encouraging because small-cap value companies "screen better" with money managers when their leverage ratios sit below 3.40x and is "only one turn away from what we consider true capital efficiency in the Media space."

"Of course, as more debt gets pared, the pace in achieving that capital efficiency quickens, since by simple definition, less debt results in more FCF, which in turn results in even lesser debt, which equals more FCF, which of course benefits equity holders," the analyst emphasized.

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