Lions Gate Roars Ahead

The film and TV production company has assets that will carry shares forward in the coming years.

Feb 13, 2014 at 9:21AM

While Warner Brothers may have most of the current media adulation for its recent hit films -- from Gravity to The Lego Movie -- Lions Gate Films (NYSE:LGF) continues to impress investors and analysts. Leading the way for the company is its ultralucrative The Hunger Games franchise, with the second installment hauling in nearly $1 billion in box office sales. But it isn't just teen fantasy that is keeping Lions Gate moving. The company's international and U.K. segments are both performing phenomenally in addition to an increasingly attractive television business. Fortunes can shift quickly in the entertainment industry, but Lions Gate investors have plenty of reasons to stay happy in the near future.

The Hunger Games' latest installment, Catching Fire, predictably owned the box office -- generating $860 million in global sales and surpassing the first film's take by 25%. The cash cow franchise will continue boosting sales and profits for years. For one thing, Catching Fire will continue earning global box office revenue and, shortly thereafter, the film will earn television and rental fees.

The final chapter of the franchise is split into two films -- Mockingjay Part 1 and Part 2 -- with releases at the end of the current year and then November 2015. If the first two films are any indication, the coming releases will generate billions. This alone could be enough for Lions Gate to sustain for years, but the company is thriving independently of its flagship asset.

The Motion Picture segment overall saw sales rise 12%. TV revenue within film, which includes use of the company's previous cash cow -- Twilight -- increased 7% to $105.8 million. International film revenue grew an impressive 31% (largely based on Catching Fire), and U.K. revenue rose 53%. Television production, including the Netflix series Orange Is the New Black, grew sales 17% to $70.1 million.

Plenty ahead
Again, Lions Gate could easily satisfy investor appetites for growth solely with its Hunger Games franchise, but there is more going on. The company continues to earn a high margin on its film library, which recently hit a record quarter in terms of sales. Management expects the strength in that segment to continue through the year. A strong theatrical slate and the continued strength of TV properties like Orange Is the New Black and Nashville will undoubtedly keep things moving.

On a fundamentals level, Lions Gate is only improving. As management noted in the recent conference call, the cost of debt has been cut nearly in half -- from 10.25% to 5.13%. Much of the free cash generated is going toward debt reduction. In 13 months, the company has brought its borrowings from $446 million to less than $70 million.

As Lions Gate is a less diversified company than other conglomerate-owned studios, it's more susceptible to flops, shifts in consumer taste, etc. But for the time being, there is little evidence that the company should see anything of the sort. For the past year, the market has consistently underestimated the growth that this company is achieving. Whether that continues to happen or not, Lions Gate is a win for investors today and onward.

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