Lionsgate Stock Surges on Buyout Buzz. How to Play LION Here.

Over the past year, artificial intelligence news has dominated the entertainment sector. However, traditional media assets are now attracting increasing interest among strategic acquirers. This can be seen Friday after the rumors emerged that Lionsgate Studios (LION) had attracted takeover interests from numerous parties, causing its stock prices to shoot up.

As per reports, Bolloré Group of France showed an interest in acquiring the studio. Moreover, Banijay Group is also exploring the possibility of making an offer. LIONSgate reportedly has an investment bank advising it on the possibilities of strategic alternatives, but it is not yet sure whether there will be a deal as Lionsgate might end up staying independent. These rumors come just a few weeks after Lionsgate posted its best profit in over a decade, meaning that improved performance might now attract strategic buyers.

About Lionsgate Studios Stock

Lionsgate is one of the biggest independent film and television studios in Hollywood. It produces movies, television programming and boasts one of the most valuable film and television libraries in the world. It is headquartered in Santa Monica, California and possesses such recognizable movie franchises as John Wick, The Hunger Games, Saw, and Now You See Me. Lionsgate currently has a market capitalization of $3.96 billion.

Even with the gains seen today, LION is currently trading 16.9% below its 52-week high of $16.70. Nevertheless, the stock price has risen by 145.7% from the last year's low of $5.65, fueled by increasing optimism after the split of the studio business from parent company. Whereas the S&P 500 Index ($SPX) continues reaching new record heights, LIONSgate has been mostly traded on the basis of the company's catalysts including movie releases, restructuring initiatives and now takeover speculations.

In terms of valuation, Lionsgate trades at around 1.5 times sales, a relatively small multiple for a premium content owner with an extensive library of intellectual properties. Despite a high forward price-to-earnings ratio of 84.61 times, this multiple is reflective of the recovery of profits after several years of restructuring. The focus of the investors, however, lies on improving free cash flow generation and the long-term value of the content library, which has already brought more than $1 billion of TTM revenue for three consecutive quarters.

Lionsgate Studios Posts Solid Results with Best Profitability in Years

Lionsgate posted some great results in its fiscal Q4, highlighting the improving performance of the business. Revenue hit $906.5 million, whereas operating income rose by 52% year-over-year (YOY) to $117.5 million. The net income attributable to the company was $70.2 million or $0.23 per diluted share, whereas the adjusted EPS reached $111.6 million or $0.37 per share.

Among the most encouraging figures, there is the adjusted OIBDA of $165.4 million, which marked the best quarterly profitability in approximately 12 years. Free cash flow also proved exceptional at $190.4 million, adding further flexibility to Lionsgate as it invests in future productions.

Managers attributed this performance to successful monetization of the company's content library and theatrical releases. The Housemaid earned almost $400 million at the global box office and became the highest-performing Pay One title on STARZ. Additional support came from good ancillary performance of Now You See Me: Now You Don't and strong library licensing.

Additionally, CEO Jon Feltheimer mentioned that more than half of the company's film, television and live entertainment portfolio consisted of branded franchises, providing greater visibility and earning possibilities than in previous years. Such an increasing predictability of cash flows will be especially appealing to strategic buyers searching for premium intellectual property.

This might be even less surprising than at first glance because of media consolidation, which has slowed down over the past two years due to increasing financing costs. Yet, improved profitability and recurring licensing revenue make Lionsgate more attractive acquisition target now than at previous rounds of negotiations, which were halted because of disagreements on valuation between buyers and shareholders.

What Do Analysts Expect for Lionsgate Studios Stock?

Analysts remain cautiously optimistic about Lionsgate with a “Moderate Buy” rating consensus and a mean price target of $14.54, which implies a potential upside of 4.8%. The highest price target currently is set at $20, implying upside of nearly 44.1%.