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Alan Gould of Brean Capital reiterated his Buy rating on Lions Gate Entertainment Corp. (USA) (NYSE: LGF) saying the company “operates in the sweet spot of the media business focused on content creation,” with a strong acquisition track record.
“The stock should be driven by the more predictable cash flow and de-leveraging once the $4.3 billion Starz (NASDAQ: STRZA) deal closes, anticipated later this quarter, rather than changes to legacy LGF's film earnings,” Gould wrote in a note.
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In a recent regulatory filing, the company laid out a number of the adjustments used to calculate its "Adjusted EBITDA."
The filing shows that the start-up costs and gains on sales were higher than Brean’s numbers or Street consensus, implying management's internal film EBITDA estimates were $65 million less than Street consensus and $38 million less than Brean’s prior estimate.
“We are now assuming film division margins of 9 percent and 10 percent for this year and next vs. our prior estimates of 12 percent and 13 percent, respectively. Our core EBITDA estimate is $10 million below management's June plan due to the underperformance of Now You See Me 2 and Blair Witch,” Gould continued.
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The analyst cut his September quarter adjusted EBITDA estimate to -$3 million from +$2 million and EPS estimate to -$0.36 from -$0.31.
Further, Gould noted that LGF should save $22 million a year in interest expense as it received better terms than expected for its $3.7 billion debt offering for the Starz transaction. In addition, the cost and LGF's unique tax synergies make the Starz deal quite accretive.
“The $200 million of estimated tax and cost synergies pay for almost half of the deal,” Gould highlighted.
Apart from providing predictable revenue and cash flow, the deal should reduce LGF’s reliance on film earnings, which are projected to decrease from 61 percent of operating income last year to 20–25 percent of operating income.
The analyst also noted that the HSX projections of the domestic box office for a number of LGF's upcoming films have continued to rise. Specifically, "La La Land" is now up to $44 million, "John Wick" $64 million and "Power Rangers" $74 million.
Gould has a price target of $27 on the stock, which closed Thursday’s trading at $18.69.
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New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.