Decoding Lions Gate Entertainment (LGF.B)'s True Market Value: Is it Modestly Undervalued?
Lions Gate Entertainment Corp (NYSE:LGF.B) has seen a daily gain of 3.82%, but a 3-month loss of -4.95%. The company also reported a Loss Per Share of 8.61. These factors raise a critical question: is the stock modestly undervalued? This article seeks to answer this question through a detailed valuation analysis. We invite you to delve into the following sections for a comprehensive understanding of Lions Gate Entertainment's intrinsic value.
A Brief Overview of Lions Gate Entertainment Corp
Lions Gate Entertainment Corp operates in the entertainment business, with its primary segments being Motion Picture, Television Production, and Media Networks. The Television Production segment, which contributes the most revenue, focuses on the development, production, and worldwide distribution of television productions including television series, television movies, and mini-series, and non-fiction programming. Despite the company's recent Loss Per Share of 8.61, the stock's current price of $8.15 and the GF Value of $11.06 suggest that the stock might be modestly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that reflects the intrinsic value of a stock. It's calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line illustrates the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on the GF Value calculation, Lions Gate Entertainment's stock appears to be modestly undervalued at its current price of $8.15 per share. The company has a market cap of $2 billion, suggesting that the long-term return of its stock is likely to be higher than its business growth due to its relatively undervalued status.
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Evaluating Financial Strength
Before investing in a company, it's crucial to assess its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. Lions Gate Entertainment has a cash-to-debt ratio of 0.17, which is lower than 78.49% of 1004 companies in the Media - Diversified industry. The overall financial strength of Lions Gate Entertainment is 4 out of 10, indicating poor financial strength.
Assessing Profitability and Growth
Investing in profitable companies, especially those with consistent long-term profitability, is generally less risky. Lions Gate Entertainment has been profitable 5 times over the past 10 years. Over the past twelve months, the company had a revenue of $3.90 billion and a Loss Per Share of $8.61. Its operating margin is 3.97%, which ranks better than 52.31% of 1038 companies in the Media - Diversified industry. However, its overall profitability is ranked 4 out of 10, indicating poor profitability.
Growth is a significant factor in a company's valuation. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Lions Gate Entertainment's 3-year average revenue growth rate is worse than 54.24% of 955 companies in the Media - Diversified industry. Furthermore, its 3-year average EBITDA growth rate is -59.3%, which ranks worse than 95.2% of 771 companies in the Media - Diversified industry.
ROIC vs WACC
Return on invested capital (ROIC) and the weighted average cost of capital (WACC) are useful measures of a company's profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, ROIC should be higher than WACC. For the past 12 months, Lions Gate Entertainment's ROIC is 1.81, and its cost of capital is 10.12.
Conclusion
In conclusion, Lions Gate Entertainment (NYSE:LGF.B) stock appears to be modestly undervalued. The company's financial condition is poor, and its profitability is poor. Its growth ranks worse than 95.2% of 771 companies in the Media - Diversified industry. To learn more about Lions Gate Entertainment stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
