key insights
- Lions Gate Entertainment has an estimated fair value of $8.0 based on Phase 2 equity free cash flow
- The current share price of $7.50 suggests Lionsgate is trading close to its fair value
- LGF.A has an analyst price target of $10.06, 27% above our fair value estimate
Lions Gate Entertainment Corp. (NYSE:LGF.A) from its intrinsic value? We’ll use the most recent financial data to determine whether a stock is reasonably priced by estimating the company’s future cash flows and discounting them to present value. This time we will use a discounted cash flow (DCF) model. Before you think you can’t figure it out, keep reading! It’s actually a lot simpler than you might think.
We would like to remind that there are many ways to value companies, and as with DCF, each method has advantages and disadvantages in certain situations.If you still have questions about such valuations, please review the Simple Wall Street analysis model.
Check out our latest analysis for Lionsgate Entertainment
method
We will use a two-stage DCF model, which, as the name suggests, considers two growth stages. The first phase is usually a period of higher growth, with the final value captured in the second “steady growth” period leveling off. In the first stage, we need to estimate the cash flow of the business for the next ten years. Where possible, we use analysts’ estimates, but when these are not available, we extrapolate prior free cash flow (FCF) based on the last estimate or reported value. We assume that companies with shrinking free cash flow will contract at a slower rate, while companies with growing free cash flow will experience slower growth rates over the period. We do this to reflect that growth tends to slow more in earlier years than in later years.
DCF is the idea that a dollar in the future is less valuable than a dollar today, so the sum of these future cash flows is then discounted to today’s value:
10-Year Free Cash Flow (FCF) Forecast
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
| Leveraged Free Cash Flow ($, Millions) | $124.3 million | $106.7 million | $190.2 million | $198 million | $204.3 million | $210.1 million | $215.5 million | $220.7 million | $225.7 million | $230.6 million |
| Sources of Growth Rate Estimates | Analyst x10 | Analyst x9 | Analyst x4 | Analyst x1 | Yes @ 3.19% | Yes @ 2.83% | is @ 2.57% | is @ 2.40% | is @ 2.27% | is @ 2.18% |
| Present value (millions of dollars) discount @ 12% | $111 | $85.4 | $136 | $127 | $117 | $108 | $98.8 | $90.5 | $82.8 | $75.7 |
(“Est” = Simply Wall St estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = $1.0
The second stage is also known as the terminal value, which is the cash flow of the business after the first stage. The Gordon Growth Formula is used to calculate the future value of the annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today’s value at a cost of equity of 12%.
Future Value (TV)= free cash flow2032 × (1 + g) ÷ (r – g) = US$231m× (1 + 2.0%) ÷ (12%– 2.0%) = US$2.4b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= $2.4 b÷ ( 1 + 12%)10= $787 million
The total value is the sum of the cash flows over the next ten years plus the discounted future value to get the total equity value, in this case $1.8b. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of $7.5, the company’s fair value represents a 5.4% discount to the current share price. But remember, this is only an approximate estimate, and like any complex formula – garbage in, garbage out.
suppose
Now the most important input to discounted cash flows is the discount rate and of course the actual cash flows. If you disagree with these results, do your own calculations and use assumptions. The DCF also does not take into account the likely cyclicality of the industry or the future capital requirements of the company, so it does not give the full picture of the company’s potential performance. Given that we are looking at Lions Gate Entertainment as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) accounting for debt. In this calculation, we used 12%, which is based on a leveraged beta of 1.632. Beta is a measure of a stock’s volatility relative to the overall market. Our beta is derived from the industry average beta of globally comparable companies, limited between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis of Lionsgate Entertainment
- The income covered the debt well.
- No major weaknesses of LGF.A were found.
- It is expected to reduce losses next year.
- Good value based on price-to-sales and estimated fair value.
- Significant insider purchases in the past 3 months.
- Cash flow from operations does not cover debt very well.
- With less than 3 years of cash runway based on current free cash flow.
- It is not expected to be profitable in the next 3 years.
Looking to the future:
Valuation is only one side of the coin in terms of building an investment thesis, and it’s only one of many factors you need to evaluate a company. The DCF model is not the be all and end all of investment valuation. Instead, the best use of the DCF model is to test certain assumptions and theories to see if they cause companies to be undervalued or overvalued. For example, if terminal value growth rates were adjusted slightly, it could change the overall results significantly. For Lions Gate Entertainment, there are three other factors you should explore:
- risk: You should know 2 warning signs for Lionsgate Entertainment We found out before considering investing in the company.
- future earnings: How does LGF.A’s growth rate compare to its peers and the broader market?Gain insight into analyst consensus numbers for the next few years by interacting with us Free analyst growth forecast chart.
- Other High Quality Alternatives: Do you like a good all-rounder?explore Our interactive list of premium stocks lets you know what else you might be missing!
postscript. Simply Wall St updates the DCF calculation for every US stock daily, so if you want to find the intrinsic value of any other stock, just Search here.
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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.
