The National Basketball Association canceled the first two weeks of the regular season, and by the looks of the divide between the two negotiating parties, more cancellations appear to be a certainty. The NBA’s lockout has already been in effect for four months. Now, the split between the owners and the players seemingly threatens the entire 2011-12 season.
I don’t presume to be qualified to pass judgment on which side of the bargaining table has the stronger argument. I do know, however, that the biggest bone of contention is the revenue split of so-called basketball-related income, or BRI. The owners want a higher percentage of BRI, and while the players say they are willing to reduce their share of BRI, an agreement on percentages is still very far away.
What I do feel qualified to do is warn investors about the stocks that stand to suffer the most from a protracted NBA lockout, and/or a complete cancellation of the upcoming season.
Here are four stocks to pass on due to the NBA lockout.
The Madison Square Garden Co.
Shares of The Madison Square Garden Co. (NASDAQ:MSG) were downgraded to “neutral” by Bank of America Merrill Lynch in August, as analysts from the firm cited the lost income caused by the NBA work stoppage. “Despite our continued belief in MSG’s robust long-term story … we think the shares will be unlikely to outperform over the near-term with $90 million of adjusted operating cash flow at risk from a full-season NBA lockout,” the analysts wrote in a note. The firm lowered its price target for MSG shares to $28. During the past three months, MSG shares have dropped 8%, and there could be more downside to come if the NBA season is terminated.
Athletic footwear and apparel giant Nike (NYSE:NKE) is one of the world’s most popular brands. The company also controls about 90% of the $2.4 billion basketball footwear market. The loss of this high-profile NBA spokesman almost certainly will put a crimp in the company’s bottom line. Although Nike has plenty of other revenue streams to keep the bulk of their massive income rolling in, and though it gets massive exposure from a variety of both professional and collegiate sports to help fuel that income, the loss of brand exposure via the NBA is impossible to replace.
Walt Disney Co.
Media giant Walt Disney Co. (NYSE:DIS) is another company with massive revenue streams that can shield it from a loss of NBA-generated revenue. However, the revenue from sports broadcasting is quite substantial. Disney owns ESPN and ABC, and it receives about 55% of its revenues from sports television. After the football season is over, basketball assumes the top draw for sports viewership. But without a NBA season, Disney is going to see a revenue drop, perhaps enough to put pressure on earnings per share going forward — and by extension, the price of DIS shares.
Athletic footwear retailer Footlocker, Inc. (NYSE:FL) features the latest in basketball shoes, and with an absence of an NBA season, the company is liable to feel the pinch in its sales. Footlocker’s traditional customer base is the young male athlete who loyally buys his hero’s favorite brand. That all-important brand recognition will be less than robust with no NBA season.
As of this writing, Jim Woods did not own a position in any of the aforementioned stocks.