Never underestimate the soothing effects of a happy cat, purring its contentment.
Investors upset over Lions Gate's (NYSE: LGF ) performance yesterday appear to have been lulled back into complacency, thanks to management's soothing words about next quarter's news. The fast-growing company, which produces content for everyone from Disney's (NYSE: DIS ) ABC to CBS's (NYSE: CBS ) Showtime to News Corp's (NYSE: NWS ) Fox, fell far short of profits expectations on Monday. Wall Street had predicted that we would see $0.07 per share in profits; in fact, Lions Gate produced $0.02 per share, on $291 million in revenue.
But the thing that seems to be saving the stock this morning is guidance, which looks as good as yesterday's actual results were bad. Peering ahead, Lions Gate says it will take in more than $400 million in revenue during the current fourth fiscal quarter of 2008, thus ending the year with $1.2 billion. The company also expects to generate $110 million in free cash flow.
That will be a neat trick, because so far this year, Lions Gate has only managed to burn cash. With three quarters down and less than one to go, the company's free cash flow tally stands at negative $54.6 million -- a far cry from the $58 million in positive free cash flow racked up by this time last year. But let's assume management can indeed pull the rabbit out of its hat. What would Lions Gate be worth if it does hit the $110 million mark for this year?
The competition
$110 million in cash profits would mean that Lions Gate trades for a measly 10 times price-to-free cash flow. For comparison, Marvel (NYSE: MVL ) sells for 37 times its free cash flow. DreamWorks Animation SKG (NYSE: DWA ) shares command a multiple of roughly 13. Now, admittedly, moviemaking is a lumpy business -- as the year-to-date dichotomy in last year's vs. this year's free cash flow production demonstrates. Still, a multiple of 10 looks awfully cheap to me. Cheaper than these other two moviemakers, both of which have already won slots on David Gardner's side of the Motley Fool Stock Advisor portfolio.
Given Lions Gate's fantastic growth, penchant for "edgy" films and television shows, and willingness to seek business in new niches (I'm referring to last quarter's announced co-production deal with Mexico's Grupo Televisa SA (NYSE: TV ) ), I have to wonder whether Lions Gate deserves its own place in David's portfolio. For my part, I'm going to put my reputation where my keyboard is. Today, I'm rating the stock an "outperformer" on Motley Fool CAPS. Feel free to follow along and see how it works out.
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