Can Lions Gate Continue Its Run?

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Since its darker days and fierce shareholder battles in the relatively recent past, film studio Lions Gate Entertainment (NYSE: LGF  ) has been on a near-vertical tear -- up nearly 150% in the past year alone. In its most recent earnings release, the company again surpassed analyst expectations, fueled by the constant gold mine that is the Twilight franchise. But with the bulk of Twilight profits already on the books, does the company still have room to run? As long as Jennifer Lawrence stays hungry, things should be pretty good for this Hollywood highflier.

Earnings recap 
Film studios are difficult investments, with returns often fueled by speculation of box office smashes. But as evidenced by this past weekend's opening flop of After Earth (a $100  million M. Night Shyamalan-helmed vehicle for Will Smith and Mini Will Smith), there is no exact formula that equates to success in Hollywood.

Regardless, Lions Gate has for many months now been navigating the entertainment waters with a golden compass.

For the fourth quarter of fiscal 2013, Lions Gate booked $785 million in revenue, just a few hundred million more than analyst expectations of $447 million. On the bottom of the income statement, the company brought in $0.66 per share, representing a more than $0.20 premium to the Street's predictions.

Twilight home-video sales, and The Hunger Games' first installment on DVD and Blu-ray, were a nice boost to earnings and allow for promotion of upcoming installments of the latter, in addition to new franchises just about to kick off. The company's digital distribution agreements with outlets such as Netflix and Hulu have also proved to be very successful and look to further enhance the Lions Gate name in coming years.

With such a tremendous run-up, though, are investors ill-advised to jump on board? If the past is indicative of the future, this stock could still be headed higher.

Coming soon 
Lions Gate seems to have figured out better than most that appealing to teenagers' flaky yet obsessive reading habits makes for big box-office numbers. The company has just launched the trailer for the first installment in the Ender's Game franchise. Investors (and everyone trying to go to the movies that day) can bet on a major opening for this film, not to mention the residual back-end income. Other franchise sequels coming down the pipeline include The Expendables 3 and a reboot of the totally awesome classic Highlander. 

On the television and digital distribution front, things look strong as well. Lions Gate's biggest TV property, Mad Men, is permanently wrapping next season, but coming soon is a series with megastar George Lopez, with the creator of Home Improvement running the show. Also on tap are two digital-only productions -- a comedy for Hulu, and a highly anticipated series titled Orange Is the New Black as the next freshman-year effort from Netflix. The show is set to debut in July.

Good team, good prospects
Lions Gate CEO Jon Feltheimer has just signed on to remain as the company's chief. Not that he is a one-man train to success, but the company weathered its Carl Icahn-induced storm of a couple of years ago and has bounced back stronger than ever. Coupled with its attractive movie and TV strategies, I find the company to be in as good a condition as ever.

The valuation is rich at nearly 18 times forward earnings, but investors can expect this studio to continue its expansion and bite into the earnings of the megastudios. For a summer blockbuster, investors should take a closer look at Lions Gate Entertainment.

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9/28/2016 4:02 PM
LGF $20.65 Up +0.23 +1.13%
Lions Gate Enterta… CAPS Rating: ****