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The Piano Man Is Driving Gains in This Stock

The Piano Man Is Driving Gains in This Stock

Madison Square Garden Co. (NYSE: MSG) broke out of a basing pattern and could now be a favorite of momentum investors.


The breakout comes after the company delivered a strong earnings report in mid February. The headlines number caught the attention of investors as the company reported earnings per share (EPS) of $7.96. As was the case with many companies, much of the earnings was due to the changes in tax law.

FactSet Research recently noted that the “Tax Law Widened the Divide Between GAAP and Non-GAAP EPS.” GAAP (generally accepted accounting principles) earnings are those based on relatively strict accounting rules. Non-GAAP earnings exclude one time gains and losses.

The research firm added, “There are mixed opinions in the market about the use of non-GAAP EPS.

Supporters of the practice argue that it provides the market with a more accurate picture of earnings from the day-to-day operations of companies, as items that companies deem to be one-time events or nonoperating in nature are typically excluded from the non-GAAP EPS numbers.

Critics of the practice argue that there is no industry-standard definition of non-GAAP EPS, and companies can take advantage of the lack of standards to exclude items that (more often than not) have a negative impact on earnings to boost non-GAAP EPS.”

This quarter, the difference between the two numbers is unusually large as the chart below shows. This is based on reports from companies in the Dow Jones Industrial Average but is representative of the data for the larger number of companies that are not part of that index.

DJIA Median Difference

Source: FactSet

In the case of MSG, GAAP earnings more than doubled earnings adjusted for pretax gains of $3.19 per share that the company reported. These results still exceeded Wall Street expectations. The average estimate of four analysts surveyed by Zacks Investment Research was for earnings of $1.87 per share.

The Madison Square Garden Company is a holding company, which is engaged in live experiences consisting of celebrated venues, sports teams, and entertainment productions. The Company operates in two segments, which include MSG Entertainment and MSG Sports.

The MSG Sports segment includes the New York Knicks of the NBA, the New York Rangers of the NHL, the New York Liberty of the Women’s National Basketball Association, the Hartford Wolf Pack of the American Hockey League, which is the primary player development team for the Rangers, and the Westchester Knicks, an NBA Development League team.

The MSG Entertainment segment presents or hosts live entertainment events, including concerts, family shows, performing arts and special events. This division is currently hosting a Billy Joel residency at Madison Square Garden.

Later this year, a performance in September will be Joel’s 102nd time to headline at the arena which can hold up to 20,000 people and his 56th performance since he took up residency in the venue four years ago. Joel has sold 1 million tickets at the Garden.

The company attributed the strong quarterly results to gains at MSG Entertainment which saw revenue rise 41% due to increases at The Theater at Madison Square Garden, the Forum, the Garden and The Chicago Theatre.

The company also had higher ticket sales for the Christmas Spectacular starring the Radio City Rockettes which was noted by the company’s management in the earnings release.

Executive Chairman and CEO Jim Dolan said, “For the fiscal 2018 second quarter, we delivered strong year-over-year growth in revenues and adjusted operating income, fueled by our continued focus on providing the very best in live experiences.

Our performance this quarter was highlighted by strong bookings results, record revenue for the Christmas Spectacular and broad-based growth across our Sports segment.  With regard to our venue expansion strategy, we continue to make important progress on the design of our Las Vegas venue.

Looking ahead, we remain confident in our ongoing ability to deliver attractive long-term growth and value creation for our shareholders.”

In contrast to the entertainment operating division, MSG Sports revenue was up 5% to $265.1 million.

Trading A Potential Uptrend

When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.

Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.

bull put spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for MSG

For MSG, a bull put spread could be opened with the March 16 put options. This trade can be opened by selling the March 16 $230 put option for about $1.10 and buying the March 16 $220 put for about $0.20.

This trade would result in a credit of $0.90, or $90 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $10.00 ($230 – $220). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $910 ($1,000 – $90).

The potential gain is about 9.9% of the amount of capital risked. This trade will be for about two weeks and the annualized rate of return provides a significant gain.

The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.