Leisure company Live Nation Entertainment is taking Wall Street by surprise today, falling to $93.09 and marking a -6.7% change compared to the S&P 500, which moved 0.0%. LYV is -20.99% below its average analyst target price of $117.82, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Live Nation Entertainment shares have outstripped the S&P 500 by 25.5%, with a price change of 47.3%.
Live Nation Entertainment, Inc. operates as a live entertainment company worldwide. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
Live Nation Entertainment's trailing 12 month P/E ratio is 67.9, based on its trailing EPS of $1.37. The company has a forward P/E ratio of 42.1 according to its forward EPS of $2.21 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.96, and the average for the S&P 500 is 15.97.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide Live Nation Entertainment's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.7. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Live Nation Entertainment's free cash flow, which was $932.19 Million as of its most recent annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, LYV is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 17.1% and has on average been $599.29 Million.
Live Nation Entertainment is likely undervalued at today's prices because it has a higher P/E ratio than its sector average, no published P/B ratio, and generally positive cash flows with an upwards trend. The stock has mixed growth prospects because of its weak operating margins with a positive growth rate, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into LYV's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
