An Intrinsic Calculation For Lions Gate Entertainment Corp. (NYSE:LGF.A) Suggests It's 50% Undervalued

December 18, 2024

Key Insights

Using the 2 Stage Free Cash Flow to Equity, Lions Gate Entertainment fair value estimate is US$15.75
Current share price of US$7.93 suggests Lions Gate Entertainment is potentially 50% undervalued
Our fair value estimate is 51% higher than Lions Gate Entertainment's analyst price target of US$10.42

Today we will run through one way of estimating the intrinsic value of Lions Gate Entertainment Corp. (NYSE:LGF.A) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Lions Gate Entertainment

The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF ($, Millions)	US$37.4m	US$278.4m	US$312.0m	US$337.4m	US$359.2m	US$378.3m	US$395.4m	US$411.0m	US$425.6m	US$439.5m
Growth Rate Estimate Source	Analyst x5	Analyst x5	Analyst x3	Est @ 8.13%	Est @ 6.47%	Est @ 5.32%	Est @ 4.51%	Est @ 3.94%	Est @ 3.55%	Est @ 3.27%
Present Value ($, Millions) Discounted @ 11%	US$33.7	US$227	US$229	US$223	US$215	US$204	US$192	US$180	US$168	US$157

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.8b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = US$439m× (1 + 2.6%) ÷ (11%– 2.6%) = US$5.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$5.5b÷ ( 1 + 11%)¹⁰= US$2.0b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$3.8b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$7.9, the company appears quite undervalued at a 50% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf — NYSE:LGF.A Discounted Cash Flow December 18th 2024

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Lions Gate Entertainment as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 11%, which is based on a levered beta of 2.000. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Lions Gate Entertainment

Strength

Debt is well covered by .

Balance sheet summary for LGF.A.

Weakness

Interest payments on debt are not well covered.

Shareholders have been diluted in the past year.

Opportunity

Forecast to reduce losses next year.

Good value based on P/S ratio and estimated fair value.

Threat

Debt is not well covered by operating cash flow.

Has less than 3 years of cash runway based on current free cash flow.

Total liabilities exceed total assets, which raises the risk of financial distress.

Not expected to become profitable over the next 3 years.

Is LGF.A well equipped to handle threats?

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Lions Gate Entertainment, we've compiled three important aspects you should explore:

Risks: Every company has them, and we've spotted 4 warning signs for Lions Gate Entertainment (of which 1 shouldn't be ignored!) you should know about.
Future Earnings: How does LGF.A's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, 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 provide commentary based on historical data and analyst forecasts only using an unbiased methodology 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.