Lions Gate Entertainment (NYSE:LGF.A) (NYSE:LGF.B) had a dramatic surge in share prices after its latest earnings report on November 9, 2023. The quarterly results exceeded expectations on the bottom line and were in-line with estimates on the top line.
After reaching a high at $9.89 for the A shares, the stock later retreated to close a few cents off at around $9. This price action suggests that the stock attracted short-term traders, and the potential for a buyout is yet to captivate long-term investors.
Since then, the stock has soared by more than 20%, indicating possibility for a buyout at some point, signaling that investors may want to watch for significant pullbacks before taking a speculative position or increasing an existing one.
The fundamentals of the buyout thesis are yet to gain traction in the investor community’s psyche. However, with a sluggish market environment and expensive capital, private equity buyers may hesitate to make an offer. The company needs to finalize the acquisition of Entertainment One and offload the Starz burden before price action aligns with the buyout thesis.
Looking at LGF’s Q2
Lions Gate continues to capitalize on its vast library, with trailing twelve-month sales of library product reaching $870 million, a 17% increase. This aspect remains crucial as it acts as a safety net for the studio in case other segments underperform.
The company is attuned to leveraging the free-ad-supported-TV market and expects Netflix to remain a key licensee. With shifting strategies among media conglomerates, licensing content to various platforms can be a profitable route, particularly as the industry becomes saturated with content providers.
The adjusted free cash flow for the quarter increased modestly to $130 million, while the trailing six months saw a significant rise to $180 million. Despite a work stoppage impacting the company’s operations, it managed to survive fairly well, aided by diversified production partnerships and the library’s revenue.
While the movie business could perform better, especially at the box office, the company’s distribution network remains robust, focusing on ancillary channels to maximize returns. Nonetheless, it needs to generate more buzz in the film industry to attract potential buyers.
Stock Analysis and Risks
The buyout thesis for Lions Gate is highly speculative, and the timing of the potential buyout remains uncertain, posing a risk for investors.
Changes in the media environment and improved sentiment among investors could make private equity firms more inclined towards smaller deals, possibly benefitting Lions Gate in the future.
The company’s library asset holds increasing value as the demand for content rises, and as advertising improves over time, it could positively impact the stock performance.
Despite these prospects, market volatility poses a significant risk, along with the challenging interest rate environment and uncertainties surrounding the advertising sector. Additionally, the company needs to overcome the risks associated with the theatrical and television outputs to attract potential buyers.
