- By GF Value
The stock of Lions Gate Entertainment (NYSE:LGF.A, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $16.18 per share and the market cap of $3.3 billion, Lions Gate Entertainment stock is estimated to be significantly overvalued. GF Value for Lions Gate Entertainment is shown in the chart below.
Warning! GuruFocus has detected 6 Warning Signs with LGF.A. Click here to check it out.
LGF.A 15-Year Financial Data
The intrinsic value of LGF.A
Peter Lynch Chart of LGF.A
Because Lions Gate Entertainment is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Lions Gate Entertainment has a cash-to-debt ratio of 0.17, which which ranks worse than 81% of the companies in the industry of Media - Diversified. The overall financial strength of Lions Gate Entertainment is 3 out of 10, which indicates that the financial strength of Lions Gate Entertainment is poor. This is the debt and cash of Lions Gate Entertainment over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Lions Gate Entertainment has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $3.3 billion and loss of $0.11 a share. Its operating margin is 5.10%, which ranks in the middle range of the companies in the industry of Media - Diversified. Overall, GuruFocus ranks the profitability of Lions Gate Entertainment at 5 out of 10, which indicates fair profitability. This is the revenue and net income of Lions Gate Entertainment over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Lions Gate Entertainment is -1.3%, which ranks in the middle range of the companies in the industry of Media - Diversified. The 3-year average EBITDA growth rate is 2.1%, which ranks in the middle range of the companies in the industry of Media - Diversified.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Lions Gate Entertainment's return on invested capital is 2.41, and its cost of capital is 9.37. The historical ROIC vs WACC comparison of Lions Gate Entertainment is shown below:
In conclusion, Lions Gate Entertainment (NYSE:LGF.A, 30-year Financials) stock is believed to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Media - Diversified. To learn more about Lions Gate Entertainment stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.