Mini-major movie studio Lions Gate Entertainment (NYSE:LGF-A) (NYSE:LGF-B) is thrilling its investors with a strong market day today. On a day when the major market indices moved downward, Lions Gate's shares jumped as much as 7% thanks to a pair of glowing analyst notes. After cooling down a bit, both of the tickers ended Thursday's trading 4.4% higher.
Here at The Motley Fool, we tend to take Wall Street analysts and their research with a grain of salt. Rather than accepting their findings as the gospel truth, we like to check whether the claims actually hold water.
So let's do that for today's market-moving analyst reports on Lions Gate.
What analysts are saying about Lions Gate today
SunTrust analyst Matthew Thornton upgraded Lions Gate from a hold rating to a buy today, but he also reduced his one-year target price on the ticker from $31 to $27 per share.
Thornton built his thesis around signals of strong domestic and international growth in the Starz premium cable network, which Lions Gate acquired in 2016. Starz recently added several new distribution channels, including new-age digital alternatives such as Hulu, Amazon's full-service online cable solutions in Germany and the U.K., and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Fiber in a couple of hand-picked American markets.
Despite the lower share-price target, Thornton insists that his longer-term earnings and valuation multiples for 2019 and 2020 are unchanged. His firm has previously stated that Lions Gate deserves a valuation ratio in line with its media peers, which suggests that share prices could nearly double from today's prices. The short-term price target verdict doesn't go quite that far, but SunTrust certainly sees long-term value in this stock.
Elsewhere, analyst David Miller at Imperial Capital started coverage of Lions Gate with an outperform rating and a $28 price target per share. He likes the company for its "clean" and easily understood business model.
Are these arguments on target?
Let's start with Miller's short-and-sweet analysis. It's certainly true that Lions Gate is a simpler story than many of its sector peers. Disney (NYSE:DIS) is embroiled in a massive attempt to buy out 21st Century Fox, making both of those stocks harder to evaluate. Sony (NYSE:SNE) is only partly a media company, more deeply invested into consumer electronics.
It's not easy to come up with a simpler model than Lions Gate's movie and cable-TV content production, at least among the larger names. That could change in a hurry if Lions Gate itself becomes a takeover target, of course. Until then, I see nothing wrong with Mr. Miller's logic here. The best business models could be run by a ham sandwich, after all.
How about SunTrust's core argument?
Yes, Starz found a few new outlets through which it can find more subscribers in the long run. But most of these names are tiny next to the established base of 23.5 million subscribers. Google Fiber's TV subscriber count stopped at just 69,000 members two years ago, and Alphabet has pumped the brakes on this service in recent years. Hulu might be the most convincing exception here, boasting 17 million subscribers at the end of 2017.
All told, I see these service additions as a long-term value driver that probably won't move Lions Gate's needle by any noticeable degree in 2018 or 2019. As it happens, that view aligns nicely with Mr. Thornton's longer-term target. He's not looking for a quick home run, but a more sustainable value driver over several years.
I really can't complain about that attitude, especially since Thornton backed it all up with a more modest short-term target price.
Final verdict: Not too shabby
Simplicity is an underrated marker of strong investments, and it's downright refreshing to see SunTrust committing to a multiyear view even if it requires a gloomier short-term forecast. Well done, I say. Lions Gate's shares are rising on well-reasoned analyst actions today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon and Walt Disney, and A shares of Alphabet. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Lions Gate Entertainment Class A and B, and Walt Disney. The Motley Fool has a disclosure policy.