Lions Gate Readying for a Blockbuster Year

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The film business is a finicky one -- last year's winners can be today's losers. The nature of the business prevents a certain degree of visibility when trying to forecast a company. For Lions Gate Films (NYSE: LGF  ) , though, things have been clearly progressing and look to continue that way for the foreseeable future. With major franchises bringing in top dollar from the box office, smart acquisitions, and international expansion, Lions Gate is poised to be an attractive media pick for the fashionable investor.

Hungry stock
It's hard to remember back just a couple of years ago when corporate raider (the more negative term for activist investors) Carl Icahn began harassing Lions Gate for failing to deliver value to shareholders. The battle lasted for months as Icahn tried to put himself in power at Lions Gate, but ultimately the company used a poison pill (flooded the market with new shares) and rid itself of the legendary rabble-rouser.

It would appear as if management had the right idea after all -- the stock has since shown a two-year return of roughly 215%. At a time when media companies face rising content costs and intense technological disruption, this was an unprecedented leap forward for the independent studio led by its hallmark franchises: The Hunger Games and Twilight. The two brought third-quarter film revenue up a ridiculous 189% to $673.5 million. Lions Gate is cruising into 2013 after a year in which it became the first non-major studio to gross over $1 billion at the domestic box office. The company grossed more than $2.5 billion in the global box office.

While The Hunger Games and Twilight were the major titles driving revenue, the company had other segments performing well in the third quarter.

Third quarter, an introspective
Lions Gate has become the de facto leader of the horror space, making healthy profits from its last four horror releases. It is evidence of a greater overall ability to tailor its films to the young adult audience -- a very lucrative demographic for a film studio. The company has international distribution agreements for 80% of the movie-going audience outside of China and India. Lions Gate owns 50% of IDC, an international distributor that brought in $125 million for the Latin American release of Twilight: Breaking Dawn 2.

On the television front, the company has apparently scored a win with Charlie Sheen's new sitcom Anger Management. Viewed by some as a risky move following the actor's blowout with Two and a Half Men and then his public meltdown (or blowup, depending on how you look at it), the new show is in its second season and has shown ratings growth year over year. Lions Gate also owns a piece of Mad Men, which is readying for its penultimate season this year.

Management is comfortable that the free cash flow ($125 million in the third quarter) generated from its performing titles and properties will enable the company to drastically de-lever from its current heavy debt load.

As the company closes out its fiscal 2013, it is clear things will keep going their way. But what about further out?

Lions Gate has a good mix of tentpoles and indie films slated for the next calendar year that should continue to prop up revenues. The next Hunger Games film is undoubtedly the most anticipated film release of the year, at least in terms of box office numbers. The second installment of the uber-profitable franchise comes out in November.

Also slated for 2013 is a sequel to Red, with the same cast of Bruce Willis, John Malkovich, Mary-Louise Parker, and Helen Mirren. Another cash cow, the Tyler Perry franchise, is pushing out yet another film. Lions Gate has two highly anticipated releases for the latter half of the year -- Ender's Game and the first film in the Divergent franchise. The Divergent books have witnessed similar success to that of Twilight and The Hunger Games.

If the past two years have been any indication of Lions Gate's ability to put out movies that resonate strongly with the young adult crowd, 2013 should prove to be yet another banner year.

Buy, sell, or hold?
At just under 14 times earnings, Lions Gate is in line with some majors such as Disney (14.16 times) and under conglomerate/mega-studios such as Comcast's NBC Universal (17.55 times). The company trades well below DreamWorks (20.28 times), which is more comparable in size and scope than the others.

Given the company's growth prospects, management's keen eye for what sells, and comparable valuations, Lions Gate remains an attractive pick -- even 215% after the beginning of its upward drive.

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5/27/2016 4:02 PM
LGF $21.84 Up +0.58 +2.73%
Lions Gate Enterta… CAPS Rating: ****