BUSINESS
Lions Gate Entertainment Corp. engages in the film, television, subscription, and location-based entertainment businesses in the United States, Canada, and internationally. It operates through three segments: Motion Picture, Television Production, and Media Networks. The Motion Picture segment engages in the development and production of feature films; acquisition of North American and worldwide distribution rights; North American theatrical, home entertainment, and television distribution of feature films produced and acquired; and worldwide licensing of distribution rights to feature films produced and acquired. The Television Production segment is involved in the development, production, and worldwide distribution of television productions, including television series, television movies and mini-series, and non-fiction programming.
INVESTMENT RATING
With future capital returns forecasted to exceed the cost of capital, LGF.A is expected to continue to be a major Value Builder.
Lions Gate Entertainment has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Lions Gate Entertainment has a poor Appreciation Score of 22 but a good Power Rating of 85, with the Neutral Value Trend Rating the result.
Lions Gate Entertainment’s stock is selling well above targeted value. The current stock price of $9.51 compares to targeted value 12 months forward of $7.
Lions Gate Entertainment’s low appreciation potential results in an appreciation score of 22 (78% of the universe has greater appreciation potential.)
Lions Gate Entertainment has a Power Rating of 85. (This good Power Rating indicates that LGF.A has a better chance of achieving attractive investment performance over the near to intermediate term than all but 15% of companies in the universe.)
Factors contributing to this good Power Rating include: the recent trend in LGF.A’s earnings estimates has been extremely favorable; and recent price action has been extremely favorable. An offsetting factor is the Motion Picture, Videotape Production comparison group is in an extremely unfavorable position currently.
INVESTMENT PROFILE
LGF.A’s financial strength is average. Financial strength rating is 58.
Relative to the S&P 500 Composite, Lions Gate Entertainment Corp has both Growth and Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that LGF.A is extremely high risk. High historical growth is a positive for LGF.A. Relative weaknesses include: low historical profitability, high stock price volatility, high financial leverage, low expected growth, and high earnings variability. LGF.A’s valuation is moderate: low dividend yield, moderate P/E ratio, and median price/book ratio. LGF.A has unusually low market capitalization.
CURRENT SIGNALS
Lions Gate Entertainment’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.
Lions Gate Entertainment’s current technical position is very weak. The stock price is in a 1.9 month down move. The stock has declined 17.1% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Significant negative changes in fundamentals have recently occurred for Lions Gate Entertainment Corp (NYSE: LGF.A): significant quarterly sales deceleration occurred, and significant quarterly earnings deceleration occurred.
The stock is currently rated C.
Lions Gate Entertainment Corp (NYSE: LGF.A) stock rose modestly by 0.3% on 3/19/24. The stock closed at $9.51. However, trading volume in this advance was unusually low at 56% of normal. The stock has been exceptionally strong relative to the market over the last nine months but has declined -6.4% during the last week.
CASH FLOW
In 2023, Lions Gate Entertainment experienced a significant decline in cash of -$84.6 million (-22%). Sources of cash were lower than uses. Cash generated from 2023 EBITDA totaled +$197.9 million. Non-operating uses consumed -$1,757.2 million (-888% of EBITDA). Cash taxes consumed -$28.3 million (-14% of EBITDA). Withdrawal of investment from the business totaled +$1,416.7 million (+716% of EBITDA). On a net basis, debt investors removed -$26.8 million (-14% of EBITDA) while equity investors provided +$113.1 million (+57% of EBITDA).
LGF.A’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Lions Gate Entertainment Peer Group. In most years, Lions Gate Entertainment was in the top quartile and second quartile. Currently, Lions Gate Entertainment is lower quartile at -888% of EBITDA (-$1,757.2 million).
LGF.A’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Lions Gate Entertainment Peer Group. In most years, Lions Gate Entertainment was in the third quartile and top quartile. Currently, Lions Gate Entertainment is at median at -14% of EBITDA (-$28.3 million).
LGF.A’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Lions Gate Entertainment Peer Group. (Since 2021 Business Re-investment, %EBITDA has decelerated very sharply.) In most years, Lions Gate Entertainment was in the top quartile and lower quartile. Currently, Lions Gate Entertainment is upper quartile at +716% of EBITDA (+$1,416.7 million).
LGF.A’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Lions Gate Entertainment Peer Group. In most years, Lions Gate Entertainment was in the top quartile and lower quartile. Currently, Lions Gate Entertainment is slightly below median at -14% of EBITDA (-$26.8 million).
LGF.A’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Lions Gate Entertainment Peer Group. (Since 2020 Equity Investors, %EBITDA has decelerated very sharply.) In most years, Lions Gate Entertainment was in the top quartile and lower quartile. Currently, Lions Gate Entertainment is upper quartile at +57% of EBITDA (+$113.1 million).
LGF.A’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Lions Gate Entertainment Peer Group. In most years, Lions Gate Entertainment was in the top quartile and lower quartile. Currently, Lions Gate Entertainment is below median at -43% of EBITDA (-$84.6 million).
LGF.A’s Cash, %Revenue has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Lions Gate Entertainment Peer Group. (Since 2021 Cash, %Revenue has experienced a very sharp decline.) In most years, Lions Gate Entertainment was in the third quartile and second quartile. Currently, Lions Gate Entertainment is at the lower quartile at +8%.
PROFITABILITY
LGF.A’s return on equity has eroded very significantly since 2014. The current level is 356.4% versus the high of 26.0% and the low of -256.%.
This very significant erosion was due to very strong negative trend in pretax operating return offset by very strong positive trend in non-operating factors.
The productivity of LGF.A’s assets declined over the full period 2014-2023: asset turnover has suffered a very strong overall downtrend although it experienced a very sharp recovery after the 2021 low.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend even as it recently stabilized from the 2023 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
LGF.A’s return on equity is upper quartile (356.4%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is lower quartile (-16.0%) reflecting asset turnover that is above median (0.56X) and lower quartile pretax margin (-28.8%).
Tax “keep” rate (income tax management) is above median (101.1%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is lower quartile (-21.9X).
GROWTH RATES
Overall, Lions Gate Entertainment Cor’s growth rate has slowed considerably in recent years.
Lions Gate Entertainment Cor’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been -0.3% per year.
Total asset growth has been 4.1% per year.
Annual E.P.S. growth has been -3.2% per year.
Equity growth has been 4.4% per year. (More recently it has been -19.8%.)
Lions Gate Entertainment Cor’s consensus growth rate forecast (average of Wall Street analysts) is -950.0% — substantially below the average of the historical growth measures.
Relative to the Lions Gate Entertainment Peer Group, Lions Gate Entertainment’s historical growth measures are erratic. Equity growth (4.4%) has been at the upper quartile. Total asset growth (4.1%) has been above median. Revenue growth (-0.3%) has been slightly above median. E.P.S. growth (-3.2%) has been below median.
Consensus growth forecast (-950.0%) is lower quartile.
PRICE HISTORY
Over the full time period, Lions Gate Entertainment’s stock price performance has been variable and significantly below market. Between May, 2013 and March, 2024, Lions Gate Entertainment’s stock price fell -83%; relative to the market, this was a -95% loss. Significant price moves during the period: 1) December, 2022 – April, 2023: +101%; 2) December, 2021 – December, 2022: -66%; 3) October, 2020 – June, 2021: +209%; 4) January, 2018 – October, 2019: -76%; and 5) July, 2015 – April, 2017: -67%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -8.5% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2024 of -8.5% is lower quartile relative to Lions Gate Entertainment Corp Peer Group.
Current 5-year total return performance of -8.9% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of -8.9% relative to S&P 500 Composite, Lions Gate Entertainment’s total return performance is lower quartile relative to Lions Gate Entertainment Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, LGF.A’s overall valuation is quite low. Ratio of enterprise value/earnings before interest and taxes is near the upper quartile. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Price/equity ratio is unavailable.
Relative to Lions Gate Entertainment Peer Group, LGF.A’s overall valuation is quite low. Ratio of enterprise value/earnings before interest and taxes is at median. Ratio of enterprise value/revenue is at the lower quartile. Ratio of enterprise value/assets is lower quartile. Price/earnings ratio is unavailable. Price/equity ratio is unavailable.
Lions Gate Entertainment has a major value gap compared to the median. For LGF.A to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.24X to 1.68X. If LGF.A’s ratio of enterprise value/revenue were to rise to 1.68X, its stock price would be higher by $21 to $30.
For LGF.A to achieve upper quartile valuation relative to the Lions Gate Entertainment Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.24X to 2.73X. If LGF.A’s ratio of enterprise value/revenue were to rise to 2.73X, its stock price would increase by $71 from the current level of $9.51.
VALUE TARGETS
With future capital returns forecasted to exceed the cost of capital, LGF.A is expected to continue to be a major Value Builder.
Lions Gate Entertainment’s current Price Target of $7 represents a -25% change from the current price of $9.51.
Lions Gate Entertainment’s low appreciation potential results in an appreciation score of 22 (78% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 22, the high Power Rating of 85 results in an Value Trend Rating of C.
Lions Gate Entertainment’s current Price Target is $7 (+5% from the 2023 Target of $7 but -25% from the 03/19/24 price of $9.51). This plateau in the Target is the result of a -25% decrease in the equity base and a +39% increase in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted increase in cost of equity has a very large negative impact.
PTR’s return on equity forecast is 34.7% — substantially above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2015 and 2023. The current forecast is significantly above the 2022 low of 7%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2015 and 2023. The current forecast is significantly below the 2015 peak of 24%.
PTR’s cost of equity forecast is 13.4% — above recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2015 and 2023. The current forecast is well above the 2022 low of 3.5%.
At Lions Gate Entertainment’s current price of $9.51, investors are placing a negative value of $-3 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 15.1% versus a cost of equity of 8.1%.
PTR’s 2025 Price Target of $7 is based on these forecasts and reflects an estimated value of existing assets of $9 and a value of future investments of $-2.
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