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Lions Gate: Will the Odds Be Ever in Its Favor?

April 02, 2014 | About:
Patricio Kehoe

Patricio Kehoe

7 followers

As one of the largest film studios in the entertainment industry, Lions Gate Entertainment Corporation (LGF) produces and distributes motion pictures for theatrical and video releases, most times with a production budget under $35 million per film. The firm also produces television programming for cable and broadcast networks, and over the years has created a library of over 15,000 titles, which are distributed directly to retailers, video rental stores, and TV networks in the U.S., Canada, UK, Ireland, Australia and other international markets via its subsidiaries. Third quarter 2013’s record results led several investment gurus, like Steven Cohen (Trades, Portfolio) and George Soros (Trades, Portfolio) to buy the company’s stock recently, so let’s see if this growth will be sustainable in the long run.

Blockbuster Releases and Strategic Acquisitions

Lions Gate’s most recent blockbuster, “Divergent,” generated $4.9 million on its release night and over $94.3 million in the domestic market over the past two weeks, making it a box-office winner. As such, this latest blockbuster, along with 2014’s release of Hunger Games: Mockingjay I in November will surely help maintain the firm’s solid financial earnings throughout the year. In addition to the estimated 15 planned theatrical releases, the company is currently producing and distributing 28 TV shows on 20 networks. This focus on original content (shows include Orange is the New Black and Nashville) helped boost the segment’s revenue by 17% this past quarter, earning $82.3 million. And while competitors like Twenty-First Century Fox Inc. (FOXA) or Time Warner Inc. (TWX) benefit from theatre releases during holidays, Lions Gate’s latest Hunger Games franchise was so successful, that it contributed largely to the quarterly EPS boost of 59.5%, closing earnings at $0.59.

Furthermore, in order to enhance its competitive position and diversify its future portfolio, the company has focused in the past years on favourable acquisitions, such as TV Guide Network properties, or Summit Entertainment. The recently purchased 31.2% stake in a new premium channel called EPIX, run in a joint venture with Metro-Goldwyn-Mayer Studios (MGM) and Viacom Inc. (VIA), should also contribute to the firm’s distribution scale. On another note, as the cost of motion picture production and marketing has escalated over the years, Lions Gate has been clever in entering co-production agreements with other parties, as well as pre-selling the distribution rights of its film before completion, in order to mitigate some of the inherent industry risks.

Valuation

While fiscal 2013 showed weak results regarding EBITDA growth (-29.2%), the latest blockbuster releases, as well as boosts in the television business, were able to reboot growth by %154.1 million, up $87.2 million from the year-ago quarter. The solid annual revenue growth of 12.7% and 10.08% operating margins should also continue their upward trend looking forward, as the Hunger Games sequels launch in November 2014 and 2015, in addition to the “Divergent” sequel, set for March 2015.

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The company’s low-budget movie production strategy, in addition to the popularity of Lions Gate’s products, has also allowed for returns on investment surpassing 65%. Free cash flow, which had hit its low point in 2012 with - $216 million, is now back on track and closed at $273 million for 2013. Thus, I feel bullish about this company’s future, and I believe the stock’s trading price of 17.1x trailing earnings relative to the industry average of 18.6x makes this a smart time for investors to consider a buy.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

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