Morgan Stanley Pinpoints 3 Concerns In Lions Gate Downgrade

Lions Gate Entertainment Corporation Class A Voting Shares LGF, the entertainment and content maker behind "Orange Is the New Black," is by the company's own admission "very interested in the consolidation space" — but the stock doesn't have any upside ahead, a Morgan Stanley analyst said Tuesday.

The Analyst

Morgan Stanley's Benjamin Swinburne downgraded Lions Gate's stock rating from Overweight to Equal-weight with an unchanged $35 price target.

The Thesis

Lions Gate's stock outperformed its media and entertainment peers by 3,000 basis points in 2017 but now there are three reasons why the momentum has come to an end, Swinburne said in the downgrade note. (See the analyst's track record here.)

• Lions Gate's acquisition of Starz was seen as a notable driver of upside potential in Lions Gate's stock, but as of Jan. 1 Altice dropped Starz from around 1 million of its subscribers, which should result in a reduction in the company's EBITDA outlook by $30 to $40 million in fiscal 2019.
• Lions Gate's ability to generate a three-year low-double-digit EBITDA growth rate implies fiscal 2020 will need to see a "significant acceleration" from the prior year, the analyst said. But given the new pressure from Altice, the company's film segment EBITDA would need to meaningfully contribute — but any success at the box office is "more challenging."
• Lions Gate's TV segment has "generally lagged" the analyst's expectations for some time and remains only a "fairly modest" contributor to EBITDA, despite the company boasting strong secular tailwinds to TV production.

The price tag will include "some degree" of acquisition premium if Lions Gate is acquired, but the stock's already premium multiple implies that a traditional media buyer would likely see "minimal" accretion in any deal, Swinburne said.

Price Action

Shares of Lions Gate were little changed early Tuesday morning at $34.62.

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