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Lions Gate Entertainment (LGF) - Overvalued

August 13, 2012 | About:

I've recently been looking for put options that have a high likelihood of paying off within 6 months. My desire to go after put options is driven by the current market overvaluation and my aversion to trading on margin.

Here's a list of things that make LGF a good put option opportunity:

1) The share price is less than $20 and the beta is 0.77. Low volatility and low per share cost make the options contracts cheaper.

2) LGF hasn't had a year of positive net earnings since 2007.

3) Carl Icahn has ended his bid to take over this company.

4) Z-score is low, indicating poor financial health.

5) F-score is low, indicating poor business operation.

6) M-score indicates that LGF is probably manipulating its already awful balance sheet.

7) Low interest coverage.

8) Per share revenue decline.

9) Gross margin decline.

10) Issuance of new debt.

11) Days sales outstanding are increasing.

12) Per share book value is only $0.63. Share price is $13+

13) The macro environment is poor. U.S. GDP/Market Cap, U.S. Shiller P/E, the European debt crisis and the apparent emergence of a global recession probably mean the market as a whole will decline. See Hussman.

14) LGF does not pay dividends.

15) Earnings were released earlier this month and first quarter of fiscal year 2013 was not good.

There doesn't appear to be anything supporting the current valuation. LGF traded for $5-6 in 2008 to 2009 and not much has changed since then.

March 2013 put options with $13 strike are currently $1.30 and $11 strike March 2013 put options are currently $0.75. There’s no guarantee that the price will decline to 2009 levels, but a $7 decline in price seems possible and would result in a 600% return on investment.

Rating: 2.7/5 (3 votes)


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