Are the Odds Forever in Lions Gate's Favor?

On Thursday, Feb. 6, Lions Gate Entertainment (NYSE: LGF  ) is due to report results for the third quarter of its 2014 fiscal year. The company's shares have declined about 3.6% for the year, which is slightly less than the losses incurred by the S&P 500. This suggests that while shareholders aren't necessarily scared for the company's prospects, they aren't terribly optimistic, either. Heading into earnings, though, is this train of thought irrational? Is Lions Gate about to soar, or is it more likely that the company's future will be in as much question as Katniss Everdeen's when she jumped into the Hunger Games?

Mr. Market's expectations are higher than ever
For the quarter, Lions Gate is expected to grow revenue substantially. If analysts are accurate in their assumptions, the company's top line should increase by 13% to $841 million from the $743.6 million the company reported the same quarter a year earlier.

In terms of profitability, Mr. Market's expectations are even higher. For the quarter, analysts anticipate that earnings per share will come in at $0.46. While this may not seem high, it represents a 70% jump compared to the $0.27 that management reported for the same quarter a year earlier.

With such high expectations, can Lions Gate please investors or will it fall short? Though there is no definitive answer, looking at the company's past performance indicates that it may be up to the task. Over the past three years, the company's revenue rose 71%, from $1.58 billion to $2.71 billion. Most of this jump took place between the company's 2012 and 2013 fiscal years and stemmed from blockbuster titles like The Hunger Games and the Twilight saga.

As a result of rising revenue, the company's bottom line improved considerably. Over this time frame, earnings per share transformed from a loss of $0.23 to a gain of $1.61. On top of top-line performance, the company enjoyed a substantial tax benefit and was able to lower its selling, general, and administrative expenses from 45.4% of sales to 38.3%.

Lions Gate blows DreamWorks out of the water
While these past three years have been great for Lions Gate, they have been anything but that for DreamWorks Animation (NASDAQ: DWA  ) . As opposed to seeing revenue and profits grow, DreamWorks has seen the exact opposite. Over this time frame, the company's revenue has fallen 4.5%, from $784.8 million to $749.8 million.

In addition to declining revenue, the company has seen its earnings per share fall considerably. Between 2010 and 2012, the company's earnings have fallen from $1.96 to negative $0.43. This has been due, in part, to the company's falling revenue, but can also be chalked up to rising costs. For instance, over this time horizon, DreamWorks saw its cost of revenue soar from 64.5% of sales to 90.5% while its SG&A expenses rose from 13.8% to 17.5%.

Foolish takeaway
Based on the historical performance of Lions Gate, it doesn't seem too far out of the question to expect an earnings match or beat this quarter. This comes even in spite of The Hunger Games: Catching Fire, the second installment of its namesake trilogy, bringing in box office numbers that were great but fell short of estimates. 

However, the real question shouldn't be how the company will do just this quarter alone. Rather, it should be how the company will likely do in the long run. Yes, the company's performance these past few years has improved, but the real test will be what will happen once The Hunger Games and its other portfolio of films run their course. For the shareholder who believes that management is capable of continuing to produce blockbuster releases, Lions Gate presents a nice investment prospect. But if these recent releases are more the exception than the rule, then no amount of short-term gains from one earnings release is worth the risk of long-term loss.

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