Earnings Preview: Lions Gate Entertainment

| About: Lions Gate (LGF.A)

Company Profile

According to the Lions Gate Entertainment (LGF) website, "Lions Gate is a leading global entertainment company with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, family entertainment, digital distribution and new channel platforms."

Lions Gate is due to report earnings May 30th after the closing bell. The company will then hold its earnings conference call the following day at 9:00 a.m. ET.

Current Analyst Estimates

The consensus analyst estimate is for Lions Gate to report earnings of $0.26/share, falling toward the low end of the range, which has a low estimate of $0.07 and a high estimate of $0.87. The mean estimate for revenue comes in at $618.81 million, between estimates for revenues as low as $452.6 million and as high as $758.9 million. The estimated earnings number, if attained, would represent a year-over-year earnings decline of 21.2%, while the revenue growth, if coming in at consensus estimates, would represent growth of 64.2% from the same quarter a year ago. Earnings and revenue estimates are derived from the 11 analysts covering the stock.

Consensus Earnings Estimates Trend

Consensus estimates for earnings have grown steadily from an average estimate of $0.07 three months ago, $0.14 two months ago, and $0.23 as early as one month ago. The increase in earnings estimates has likely been driven by the success of the company's recent film "The Hunger Games."

Current Analyst Price Targets

Analysts have come out rather bullish on Lions Gate in recent months, with Caris & Co. raising the stock to an above average weighting from average. Stifel Nicholaus has reiterated its buy rating three times in the past several months; however, in its most recent reiteration, it lowered the price target to $17/share from $19/share. One month earlier, the firm had raised its price target from $17.50 to $19.

Ratio Analysis

To get a sense of the current valuation with respect to its competitors, below is the ratio analysis for Lions Gate vs. Disney (NYSE:DIS), Time Warner (NYSE:TWX), and Dreamworks Animation (NASDAQ:DWA), along with the industry and S&P 500 averages.

LGF DIS TWX DWA Industry S&P 500
Price / Earnings 53.2 15.8 12.6 17.1 15.1 15.3
PEG 3.02 1.20 1.04 1.96 --- ---
Price / Sales 1.3 2.0 1.2 2.0 1.6 1.3
Price / Book 48.8 2,1 1.1 1.1 1.8 2.2
Dividend Yield ---% 1.4% 2.8% ---% 1.3% 2.1%

Fair Value Analysis

The valuation of discounted cash flows is an effective tool in identifying the intrinsic value for well-established companies. The input for the analysis is as follows:

Revenue Growth Rate (Current Year / Ongoing) 4%
Cost of Goods Sold (COGS)(% of Revenue) 50%
Operating Expenses (% of Revenue) 47%
Tax Rate 15%
Weighted Average Cost of Capital 10%

Over the previous four years the company had been able to better manage its balance sheet, and that trend should continue. To maintain a conservative analysis, even though analysts project earnings to grow more than 40% next fiscal year, a very modest 4% annual revenue growth rate has been used. The company has shown its ability to manage costs and thus, for the analysis, 50% of revenues will be spent on the cost of goods sold (COGS), down slightly from the company's previous fiscal year.

While the company has also significantly reduced operating expenses over the past five years, the analysis will use operating expenses equivalent to 47% of revenues, a 130-basis-point increase from the previous fiscal year. A tax rate of 15% has been used even though the company only had the equivalent of a 6.3% tax rate last year, once again to preserve the conservative nature of the analysis. The weighted average cost of capital is derived from the industry average. The result is a fair value of approximately $17.39/share. This represents a significant premium (+35.9%) over the current market price.

Disclosure: I am long LGF.

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Tagged: , Movie Production, Theaters, Canada, Earnings
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