Studio's Digital Transformation With Starz Will Capitalize On Streaming Opportunities

Key Takeaways

• Strategic expansions in TV and film, along with lucrative distribution deals, are set to elevate revenue and enhance net margins.
  
• Leveraging IP and expanding ancillary revenue streams will boost profitability and support long-term earnings growth.
  
• Rising talent costs and execution and leverage risks could hinder Lionsgate's profitability amidst industry and project-specific challenges.

Catalysts

Engages in the film, television, subscription, and location-based entertainment businesses in the United States, Canada, and internationally.

• Lionsgate Studios is experiencing a strong rebound in their Motion Picture and TV segments, driven by strategic mid-budget film releases and an expanded TV slate, likely boosting future revenue and earnings.
  
• Lionsgate has entered new exclusive Pay-One deals with Starz and Amazon Prime Video, enhancing film distribution timelines and increasing revenue from the pay television window, contributing to higher net margins.
  
• The development of ancillary revenue streams through experiences and stage plays based on popular franchises like John Wick and The Hunger Games is set to deliver significant incremental contributions, positively impacting future earnings.
  
• Starz's strategic shift towards digital has led to OTT subscriber growth and innovative bundling deals, positioning it to capitalize on streaming market inflection points, which should support revenue stability and growth.
  
• Lionsgate continues to leverage IP portfolio opportunities, such as upcoming projects based on popular franchises and the E1 library acquisition, driving content output and potentially raising revenue and profitability in the coming fiscal years.

Lions Gate Entertainment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lions Gate Entertainment's revenue will grow by 5.9% annually over the next 3 years.
• Analysts are not forecasting that Lions Gate Entertainment will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Lions Gate Entertainment's profit margin will increase from -7.7% to the average US Entertainment industry of 9.2% in 3 years.
• If Lions Gate Entertainment's profit margin were to converge on the industry average, you could expect earnings to reach $420.8 million (and earnings per share of $1.65) by about April 2028, up from $-297.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, up from -7.0x today. This future PE is lower than the current PE for the US Entertainment industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 1.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Lions Gate Entertainment Future Earnings Per Share Growth

Risks

• The rising costs of talent in the industry, despite efforts to manage other production costs, could impact Lionsgate's net margins as talent expects substantial pay.
  
• Delays affecting the Starz separation, including updating financial statements and further SEC review, might result in potential regulatory and financial uncertainties affecting earnings.
  
• Elevated leverage at the studio, reaching 6.5x by quarter end, poses financial risks that could impact future revenue and earnings if not managed effectively.
  
• Execution risks, such as mismatched projects like Borderlands that failed to attract cinema audiences, could negatively affect the Motion Picture Group's earnings.
  
• A consistent decline in linear subscribers underscores a challenge in maintaining media network revenues, possibly impacting overall profitability.

Valuation

• The analysts have a consensus price target of $10.583 for Lions Gate Entertainment based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $13.0, and the most bearish reporting a price target of just $7.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.6 billion, earnings will come to $420.8 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 11.4%.
• Given the current share price of $8.63, the analyst price target of $10.58 is 18.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.