Why Lions Gate Has M&A Potential With Starz, Others

• FBR has reduced its earnings estimates and price target for Lions Gate Entertainment Corp. (USA) LGF.
• The firm now projects $300 million in domestic box office for “Mockingjay 2.”
• FBR expects that Lions Gate will continue to be active in the M&A market.

In a new report, FBR & Co analyst Barton Crockett dialed back the firm’s earnings estimates and price target for Lions Gate, but reiterated FBR’s bullish stance on the stock. Despite the recent earnings disappointments, FBR sees exciting M&A potential and a solid pipeline ahead for Lions Gate.

Recent developments
FBR has reduced its earnings estimates and price target for Lions Gate following the company’s recent acquisition of Pilgrim Studios.
 

In addition, FBR’s estimates for “Mockingjay 2” are now trending below the first “Mockingjay” movie. FBR now expects “MJ2” to generate $300 million of domestic box office and $240 million in profits versus previous estimates of $380 million and $315 million, respectively.
 

The firm’s sum-of-the-parts valuation for Lions Gate now stands at $38.

The “Hunger Games” cliff
A November Wall Street Journal story cited a knowledgeable source claiming that Lions Gate generates an average lifetime profit of $250 million for each “Hunger Games” movie. With the series coming to a close, FBR projects that the final two movies will generate about $200 million in 2016 profits and $100 million in 2017 profits for Lions Gate. Since Lions Gate is guiding for positive EBITDA growth in 2017, Crockett believes the company is extremely confident in their upcoming movie pipeline.

M&A potential
In addition to the estimated $30 million annual EBITDA boost that Lions Gate will receive from Pilgrim, Crocket also believes the company will actively seek other buyout targets. He sees Starz STRZA as the best fit and notes that tax constraints could delay a potential offer until early 2016.

FBR maintains its Outperform rating on Lions Gate.

Disclosure: the author holds no position in the stocks mentioned.