An Entertainment Company with an Effective Strategy

Lionsgate Entertainment (NYSE: LGF  ) has implemented an effective strategy of catering content to underserved markets, including Youth, Urban, Hispanic, and Horror. Whether you're a fan of Lionsgate or not, you can't argue with the company's recent successes, including "The Hunger Games" and "Orange Is the New Black." And the fan base is impressive, which is evidenced by the company's more than 270 million fans on Facebook. While Lionsgate's momentum is strong at the moment, remaining highly relevant in the motion picture and distribution business can be challenging.

Going to the movies vs. watching a movie at home

Lionsgate operates in two segments: Motion Pictures and Television Production. If you have been to the movies lately, then you have likely fallen victim to sky-high prices. With the consumer not as strong as it has been over the past several years due to lower wages, a payroll tax increase, and higher gas prices, demand for movie theater tickets has waned. Plus, many consumers own large HD televisions, which are conveniently located in their living rooms. While the experience still isn't the same as the silver screen, there's now less incentive to go to the movies.

All of the above is why Lionsgate has suffered from weakness at the theater. But don't go jumping ship just yet. If you look at Motion Picture revenue for the first quarter on a year-over-year basis, you will see an 8% increase to $438.6 million, thanks to strong Home Entertainment and International operations.

Home Entertainment revenue jumped 16% to $145.5 million. This pertains to motion pictures and television, and the improved revenue is thanks to a diversified portfolio of titles, including "Warm Bodies," "Texas Chainsaw 3D," "The Twilight Saga – Breaking Dawn Part 2," "Sinister," "The Perks of Being a Wallflower," and "The Expendables 2."

International Motion Picture revenue increased 63% to $79.1 million, and with Lionsgate focusing more on largely populated markets like Latin America, China, and India, this trend is likely to continue.

Television Production revenue more than doubled thanks to the licensing out of popular television series.

Overall, revenue for the quarter increased 21% to $471.8 million.

Content breakdown

Lionsgate offers highly diversified content, which allows it to target many different markets. 

  • TVGN: Focuses on celebrity lifestyles and entertainment news. Found in 80 million homes.
  • EPIX: More HD movies than any other service. Found in 10 million homes.
  • Fearnet: 300 horror titles per year. Fearnet.com has 30 million subscribers.
  • BeFit: Ad-supported fitness channel on YouTube.com. 540,000+ subscribers.
  • Break Media: Content for men. Break.com is the largest comedy site online.
  • KIX: Pay T.V. action entertainment channel in Asia

A risky move that paid off

Lionsgate might be best known for "The Hunger Games" at the moment, but what many people don't know is that Lionsgate bought the rights to the book when it only had 150,000 copies in print. The book later went on to sell 50 million copies, and it grossed more than $408 million at the box office.

This is more important than the average reader might realize. When it comes to content, franchises are the keys to big success. With "The Hunger Games" franchise in its arsenal, Lionsgate is likely to see more big numbers in the future, especially considering the second book installment, "Catching Fire" has sold well (429,873,093 copies.) "Catching Fire" the movie is set to be released on Nov. 22, 2013. 

"The Hunger Games" has been so popular that it drove others to want to get in on the act, including Netflix (NASDAQ: NFLX  ) . Lionsgate and Netflix signed a Pay-T.V. agreement in which Netflix will have the rights to show any of "The Hunger Games" installments.

Netflix has already seen success with Lionsgate's "Orange Is the New Black." A second season is filming, and a third season on Netflix is likely. Netflix plans on offering future seasons all at once (13 episodes), due to the increased popularity of binge viewing.

Amazon's (NASDAQ: AMZN  ) Prime Instant Video has a multi-year deal with Lionsgate's EPIX. This deal drove Amazon Prime Instant Video content title total over 25,000. However, if you're attempting to compare the two services of Netflix and Amazon Prime Instant Video in regards to popularity, then Netflix wins hands down. Netflix's subscriber count currently totals approximately 36 million, versus 10 million for Amazon Prime Instant Video. If you're considering these stocks as investments, then you should keep in mind that Netflix and Amazon are trading at 82 times earnings and 101 times earnings, respectively. But both are likely to be long-term winners; Netflix thanks to its relentless negotiating to secure top content, and Amazon thanks to its top position in online retail.

That said, there's no sense investing in companies that are trading at outrageous multiples, which could lead to gap downs on unexpected bad news. By investing in Lionsgate, you're not only investing in the company's successful strategies to target underserved markets, but the ever-increasing popularity of streaming video. And Lionsgate is only trading at 21 times earnings.

Conclusion

It's no secret that the stock market's extraordinary ascent over the past several years is met with some skepticism. If the bears are correct and the market falters, then Lionsgate isn't likely to hold up well. However, savvy investors realize that external events shouldn't scare you away from investments in quality companies. If you invest in a quality company at a slow and incremental pace, then downside moves in the stock price can actually be looked at as positives, simply because you will have an opportunity to buy more shares. Lionsgate qualifies as a quality company. 

Americans reportedly spend nearly 34 hours a week watching television! With television viewing taking up almost as much time as the average work week, the potential for profits in the space is enormous. The Motley Fool's top experts have created a new free report titled "Will Netflix Own the Future of Television?" The report not only outlines where the future of television is heading, but offers top ideas for how to profit. To get your free report, just click here!


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