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.
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.
Big Dog Competition
Lions Gate with only a $2 billion market cap is a very small fish in the Hollywood pond surrounded by major entertainment mega caps like The Walt Disney Company (NYSE: DIS), Sony Corporation (ADR) (NYSE:SNE), and Comcast Corporation (NASDAQ: CMCSA).
Comcast, whose Universal Pictures came out with “Identity Thief” which has already made back its budget earning $36 million this last weekend and “Mama” a horror flick that competes against Lions Gate’s horror stable is more of a competitor to Lions Gate than the rest of these. It has a widely varied offering of films from Oscar contenders like Les Miserables to adult comedies like “Identity Thief”. However, buying Comcast stock on the basis of entertainment revenues wouldn’t be prudent as it is still considered a cable/telecom although it doesn’t have the higher yields like Verizon and AT&T. It reports on February 13 and is trading at a 17.64 P/E and has a 1.70% yield.
Naturally enough Disney films caters to the 12 and unders (and the parent who has to accompany them) but they generally make up only 15% of moviegoers. Then Disney makes more money from its DVDs and on demand sales. For the cost of the entertainment division in Disney stock it’s like you get the resorts and licensing for free. Disney trades at a 17.66 P/E and has a 1.40% yield. Disney, of course, is not as dependent on film as Lions Gate but both of these should be seen as content providers in a world where “content is king.”
Seen in that light Lions Gate has an even brighter future and analysts expect 26.40% five year EPS growth. After that great earnings release analysts should be coming out with upgrades and initiations of coverage.
The Last Reel
Lions Gate should still be considered a speculative stock but one with a real gameplan in place and blockbusters left in their young adult pipeline. The teenage moviegoer demographic is one they really understand and their secondary revenues from the video library and television should be growing in the years to come. Lions Gate is a good piece to fit into any speculative opening in a portfolio.
The article Lions Gate Earnings: Boffo With Blockbusters originally appeared on Fool.com and is written by AnnaLisa Kraft.
