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Lions Gate stock slips double digits on JPM double downgrade

Lions Gate Entertainment stock is sharply lower Wednesday - (NYSE:LGF.A) -13.9%, (NYSE:LGF.B) -13.1% - following a double downgrade at J.P. Morgan, to Underweight from a previous Overweight.

That cut comes ahead of a planned company split that would separate Lions Gate's Starz TV business from its studio business - and amid concerns about rapidly increasing leverage.

"As we have analyzed what the post-split companies will look like, we have increasingly focused on the company's aggressive pull-forward of cash through working capital and production loans," analyst Philip Cusick said.

He agrees with management that financing assets through production loans is the right decision on working capital, the "massive growth" in the loans since last fourth quarter (more than the growth in inventory assets) means investors should look at it as part of enterprise value.

"We view some of the increase in working capital as higher leverage and we now include $712M" as liabilities against discounted cash flow, while excluding $1.45B in production loans balanced by similar growth in inventory.

There's also worries about investor interest in the stand-alone entities after a split, he said.

"The company remains exposed to declines in the linear TV market, and increased streaming competition makes us question anyone's need for the Starz platform," he wrote. And while the studio has value, potential buyers may be limited, and value is impaired by that working capital pull-forward, he added.

The firm cut its price target on (LGF.A) to $7 from a previous $10; with Wednesday's slide, that target now implies 17% upside.

In September, Benchmark stuck up for the stock as it took another double-digit decline on a spin-off update.