Three Reasons This Entertainment Leader Is Severely Undervalued
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Live Nation Entertainment (NYSE: LYV) appears undervalued based on its current price to sales multiple, its solid investor base, and its competitive position. When compared to other entertainment companies, Live Nation has a lower valuation based on such measures as price to sales and operating income while it is also able to grow some of its most important segments. Further, Live Nation has a solid investor base that includes Liberty Media (20.6% of the company's common stock), company management (9%), Tiger Global Management (8.7%), and Shapiro Capital Management (8.2%) that, together, hold over 45% of the common shares. Two years ago, Live Nation merged with Ticketmaster.com, and the company is a leader in selling tickets for global live events with minimal competition.
Live Nation has 190.7 million shares outstanding for a market capitalization of $1.8 billion and an enterprise value of $2.7 billion as the company has about $1.7 billion of long-term debt and $0.8 billion in cash and cash equivalents. While Live Nation is unprofitable, it had $5.4 billion in revenues in 2011 for a price to sales ratio of 0.33, which is favorable compared to the price to sales of the average company in the S&P 500 index of 1.3. In addition, the company appears undervalued based on the price to sales ratio of two other major online companies that are leaders in their fields. Priceline.com (NASDAQ: PCLN) and Amazon.com (NASDAQ: AMZN) have price to sales ratios of 6.1 and 15, respectively. Even compared to Madison Square Garden (NASDAQ: MSG), a New York City-centered live entertainment company, Live Nation is undervalued. Based on a current price to sales ratio of 2.6, Madison Square Garden's stock price is several times more expensive than that of Live Nation.
Also, Live Nation has positive operating income, a measure highly regarded by investment professionals and one that is a more useful metric following a corporate restructuring (when there are a lot of one time expenses). During the first nine months of 2012, Live Nation recorded an operating income of $105 million, compared to $85 million for the same period in 2011. For example, Madison Square Garden had an operating income of $99.9 million for the first nine months of 2012. However, Madison Square Garden has an enterprise value of $3.2 billion, or over 18% higher than that of Live Nation. Live Nation's leverage should aid future equity returns.
Who your major shareholders are matters. Over 50% of Live Nation is owned by large institutional insiders and company's management:
Liberty Media (20.6%) led by well known media titans John Malone and Gregory Maffei;
Company management (9%) including Irving Azoff (Chairman), James Dolan (Director), and Michael Rapino (CEO); and
Institutional investors including Tiger Global Management (8.7%), Shapiro Capital Management (8.2%), Blackrock (7%), and Harris Associates (6.6%).
A company with large shareholders, such as John Malone or Tiger Global Management, cannot be taken lightly. Most large institutions are long-term shareholders and this ensures a lower volatility for the stock price. Also, management is certainly being extra careful when most of the company's stock is controlled by investors familiar with the industry and likely to exercise pressure on management if the company is not managed well.
SEC filings reveal that in October of 2010, Liberty Media, Tiger Capital, and Shapiro held 24.9 million shares, 11.2 million shares, and 10.5 million shares, respectively. As of April 2012, the share count increased for Liberty Media, Tiger Capital, and Shapiro to about 39.2 million, 16.6 million, and 15.5 million, respectively. Over the period from October 1, 2010 to date (December 21, 2012), Live Nation common stock declined by about 4.5%. It is clear that these major shareholders expect the common stock to increase from its current level.
Anyone who has bought a ticket online for a live event or even has been to a concert knows that there is not much competition in this industry. The vast majority of tickets are sold by Ticketmaster.com, which is part of Live Nation. For the nine months ended Sept. 30, the concert and ticket segments generated revenues of $3.95 billion or about 90% of total revenues. This was up 4.8% from revenues in the comparable period of 2011 of $3.77 billion. Competition to Live Nation is, overall, fragmented as most of it comes from small to medium size local venues that often use ticketmaster.com to sell their tickets.
Live Nation is one of the largest ticket selling and live entertainment businesses in the U.S. and in many other parts of the world. The company is still not profitable, but as the recent reorganization with Ticketmaster.com is integrated, the bottom line results should improve. Recently, I bought hockey tickets for a minor league game and the price of a ticket was $15.00 while the Ticketmaster.com charge per ticket was over $6 or nearly 50% of the ticket price. You can correctly guess that the hockey stadium was not very full. However, the venue is continuing to sell its tickets through Ticketmaster.com due to lack of a reliable alternative. Finally, this is clearly a company that investors should consider. At current valuation levels and significant institutional interest, the common stock is likely a better investment than a hockey ticket.
didiooodotcom has a position in Live Nation. The Motley Fool owns shares of Amazon.com, Madison Square Garden, and Priceline.com. Motley Fool newsletter services recommend Amazon.com and Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!