Is Lions Gate Entertainment the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Lions Gate Entertainment (NYSE: LGF  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Lions Gate Entertainment.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

10.4%

Fail

 

1-Year Revenue Growth > 12%

5.6%

Fail

Margins

Gross Margin > 35%

50%

Pass

 

Net Margin > 15%

1.5%

Fail

Balance Sheet

Debt to Equity < 50%

538.8%

Fail

 

Current Ratio > 1.3

1.45

Pass

Opportunities

Return on Equity > 15%

32.5%

Pass

Valuation

Normalized P/E < 20

25.78

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With only three points, Lions Gate Entertainment isn't putting out very entertaining financial reports. But after drawing the attention of a famous billionaire investor, it now appears that the entertainment company may finally be out from under a threat of a takeover.

Lions Gate is probably best known for its television subsidiary, which produced the hit show Mad Men as well as several other series. But the company also has a movie production business that has a reputation as a leader in independent films.

For years, activist investor Carl Icahn seemed satisfied to take a relatively passive role with the company. But in 2010, when Lions Gate considered an expensive acquisition of the Metro-Goldwyn-Mayer movie studio, Icahn stepped in to make a bid for the entire company.

Ever since then, Icahn and Lions Gate have traded blows. Last year, Fool analyst Anders Bylund theorized that Lions Gate would do well to let Icahn get the studio into shape to pave the way for a possible acquisition bid from Sony (NYSE: SNE  ) or Comcast (Nasdaq: CMCSA  ) . But Lions Gate board member Mark Rachesky has become the company's second-largest shareholder and supports the current management team.

In the end, Icahn decided to sell out in August. But poor market conditions may delay the secondary offering that was to provide Icahn with his exit strategy, potentially setting the stage for continued involvement from the billionaire.

Regardless of what happens with Icahn, Lions Gate needs to escape a crushing debt load, which dwarfs that of Disney (NYSE: DIS  ) and Time Warner (NYSE: TWX  ) , as well as DreamWorks Animation's (Nasdaq: DWA  ) clean balance sheet. Doing so will give the company its best chance at moving upward toward perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click here to add Lions Gate Entertainment to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of DreamWorks Animation and Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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