Will Lions Gate Fire Up Your Portfolio With Hunger Games: Catching Fire?

Investors have bid shares of Lions Gate Entertainment (NYSE: LGF  ) sharply higher in 2013 despite lackluster year-to-date results at the box office and on the bottom line. According to data provider IMDb, the company has been shut out of the year's top ten list for box office draws while studio kingpins Warner Brothers and Universal (part of the Time Warner (NYSE: TWX  ) and Comcast (NASDAQ: CMCSA  ) empires, respectively) have each garnered two spots. However, the Nov. 21 opening of the "Hunger Games" franchise should move Lions Gate onto the list and pad its bottom line. Should investors buy in now?

What's the value?
Lions Gate has succeeded by taking some calculated risks over the years, punctuated by its $400 million purchase of Summit Entertainment in 2012 which added the popular Twilight film series to its portfolio. It has also wisely diversified beyond the film production business, cobbling together a 15,000 film and television episode library as well as adding equity ownership positions in cable networks such as EPIX and the TV Guide Network. Lions Gate's diversification efforts have created better recurring revenue streams, thereby reducing its overall risk and bringing in well-heeled industry partners like Viacom and CBS.

Lions Gate's top-line has been weak in the 2014 fiscal year, down 9.4% due to a tough comparison to the prior-year period that included the first "Hunger Games" film (which generated over $400 million at the domestic box office.) Similarly, the company's profitability has been sharply curtailed as a result of lower sales in the high-margin, downstream product areas of home entertainment distribution, and product licensing. On the upside, Lions Gate has continued to build critical mass in the television production arena. It has seen a 33% increase in episodes delivered, including new hits like "Nashville" and "Orange Is The New Black."

In the land of giants
Lions Gate is banking heavily on continued success for its "Hunger Games" franchise to provide the funds for future film and television production successes. Given the generally hefty price tag for feature film production, Lions Gate is an anomaly in an industry that is dominated by the major studios. These studios have found homes within communication behemoths like Time Warner and Comcast.

Time Warner's Warner Brothers film unit is having a solid year as the no. 1 grossing movie studio. It has had an array of titles that have crossed the $100 million threshold of domestic ticket sales, including the sleeper hits We're the Millers and The Conjuring. While the unit's top line has registered flat revenue growth in the year-to-date period, the company has high expectations for the December 2013 release of the next film in the "The Hobbit" franchise. In addition, Warner Brothers continues to fare well in the television production arena, boasting the top two ad-supported shows on broadcast television.  More importantly, the unit can rely on Time Warner's strong operating performance, with operating cash flow of $2.8 billion generated in the current period, to fund its big-budget blockbusters.

Meanwhile, Comcast's Universal film unit is also enjoying commercial success in the current fiscal year. It has had three films topping the $100 million mark, led by Despicable Me 2. The strong box office performance, where revenues jumped 21.1%, has led to further solid gains downstream in home entertainment and licensing product areas. This has helped the unit to return to profitability from the prior year's red ink. Like Warner Brothers, Universal benefits from the financial strength and cross-selling opportunities inherent in its parent's network of businesses, which include cable networks, the NBC broadcast network, and theme parks.

The bottom line
Once chiefly a Vancouver-based independent filmmaker, Lions Gate has created substantial shareholder value through shrewd decision-making and some luck. This is evident in the company garnering nineteen Emmy awards and seventeen Academy Awards over the past decade and a half. The company also seems to recognize its size disadvantage vis-à-vis its chief studio competitors, which has led it to focus its projects on the young adult demographic as evidenced by its "Tyler Perry," "Twilight," and "Hunger Games" franchises. It is also attempting to expand its reach through new media, launching the BeFit Network in January 2012 which has since become one of the largest fitness channels on Youtube. While Lions Gate is still a little fish in the big media pond, it is a stock to own for the long haul.

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