Lions Gate Entertainment Corp. (LGF) Earnings: Boffo With Blockbusters

Lions Gate Entertainment Corp. (USA) (NYSE: LGF) reported Q3 earnings after the bell on February 11 and earnings were once again boffo. Revenues soared in every division, four or six fold in most of them, with net income coming in at $0.27 a share compared to a year ago loss and beating expectations of $0.17 a share. The company also earned $125.2 million in free cash flow in the quarter. I bet Mark Cuban and Carl Icahn (who sold out around $7.00 per share) are crying in their beers as they exited the stock before the company soared with their Hunger Games, Saw, and Twilight franchises.

Not reflected in the good numbers were two very good box office weekends in a row with $36.7 million coming in for “Warm Bodies” their zombie romantic comedy. Lest you think that number is disappointing the flick opened Super Bowl weekend and drew a lot of teenage girls away from the game. Not everything was champagne and roses with “Stand Up Guys,” too much like an extended Goodfellas Viagra ad, barely bringing in $1.5 million on Super Bowl Weekend. Lions Gate hit a 52 week high on February 11 before reporting, up 67.51% over the last year mainly on the success of Hunger Games and Twilight which pushed them over $1 billion in revenues for the first time.

Why They Beat

Lions Gate truly has its fingers on the teen pulse with its horror movies bringing in teen males, its Twilight and Warm Bodies bringing in teen females, and Hunger Games bringing in both. It has filled a niche the big studios would love to have filled. CEO Jon Feltheimer acknowledged this strength in the earnings release, “The quarter reflected not only the impact of our young adult franchises, but strong contributions from the rest of our theatrical releases and our home entertainment and international operations.”

Lions Gate is a small newcomer to entertainment, only sweet sixteen, but already it is the seventh most profitable film studio. Its success has been linked to its independent status which has allowed it to make controversial and less “commercial” type films like its first big time entry “American Psycho.” The company also owns an extensive movie library comprising over 13,000 titles including home viewing faves Dirty Dancing and the Rambo series.

Its television division has been a critical winner bringing to the small screen hits like Weeds, Mad Men, The Dead Zone, Nurse Jackie, and Tyler Perry shows. The company is also in the beginning stages of building its music studio.

Just The Numbers

The company, famous for the horror flicks it releases between blockbusters like Hunger Games and Twilight, scares investors even more with its 388.10 P/E and governance risks, high for Audit and the Board. The forward P/E for March 2014 drops to 14.01. Like its films it’s not for the faint-hearted. Nor is its debt load of $1.43 billion to total cash of $54.40 million.

With such a huge P/E one would think it would have an even larger short interest than 14.80%, although that’s high enough. The company keeps shocking the shorts with their boffo earnings and I expect the short interest will gradually dwindle.

Although the success of upcoming installments of Hunger Games and Twilight may get baked into the cake there are other catalysts like the home movie release of Twilight-Breaking dawn available March 2. With 24% of moviegoers between age 12 to 24 Lions Gate has a hungry audience and those aged 25-34 watch the most DVDs or on demand movies so Lions Gate has their custom, too with that extensive film library.