Madison Square Garden Entertainment Corp. (NYSE:MSGE) shares could be 38% below their estimated intrinsic value

Key findings

• Using the 2-step free cash flow to equity, the estimated fair value of Madison Square Garden Entertainment is $59.45.
• Madison Square Garden Entertainment is estimated to be 38% undervalued based on the current share price of $36.57.
• The analyst price target of $42.43 for MSGE is 29% below our fair value estimate

Does Madison Square Garden Entertainment Corp. (NYSE:MSGE)’s July share price reflect its actual value? Today we will estimate the stock’s intrinsic value by taking the company’s projected future cash flows and discounting them to today’s value. Our analysis will use the Discounted Cash Flow (DCF) model. Models like these may seem incomprehensible to a layperson, but they are relatively easy to follow.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. For those who enjoy stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for Madison Square Garden Entertainment

What is the estimated value?

We use a two-stage DCF model which, as the name suggests, considers two phases of growth. The first stage is generally a higher growth phase that stabilizes toward the terminal value captured in the second “steady growth” stage. First, we need to obtain estimates of the next ten years of cash flows. Where possible, we use analyst estimates, but when these aren’t available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 1.3 billion US dollars

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.4%. We discount the terminal cash flows to today’s value at a cost of equity of 8.8%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = $236 million × (1 + 2.4%) ÷ (8.8% – 2.4%) = $3.7 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 3.7 billion US dollars ÷ (1 + 8.8%)¹⁰= 1.6 billion US dollars

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is $2.9 billion. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of $36.6, the company appears quite undervalued at a 38% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

Important assumptions

The key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing around with them. The DCF also doesn’t take into account the potential cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider Madison Square Garden Entertainment as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 8.8%, which is based on a leveraged beta of 1.405. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of global peers, with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Madison Square Garden Entertainment

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While important, the DCF calculation is just one of many factors you need to evaluate a company. DCF models are not the be-all and end-all of investment valuation. Rather, they should be viewed as a guide to “what assumptions need to hold for this stock to be under/overvalued.” For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. What is the reason the stock price is below the intrinsic value? For Madison Square Garden Entertainment, we have compiled three relevant elements for you to consider:

1. Risks: You should be aware 1 warning sign for Madison Square Garden Entertainment we uncovered before considering investing in the company.
2. Future income: How is MSGE’s growth rate compared to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea of ​​what else you might be missing out on!

PS. Simply Wall St updates its DCF calculation for every American stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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