Lions Gate Entertainment Corp. (USA) Earnings: Is "Divergent" the Key to Growth?

The movie and television producer has bet big on young-adult franchises. Will it pay off?

May 28, 2014 at 4:38PM

On Thursday, Lions Gate Entertainment (NYSE:LGF) will release its quarterly report, and investors haven't been pleased with the company's share-price performance lately. Even as larger rivals Disney (NYSE:DIS) and Twenty-First Century Fox (NASDAQ:FOX) have enjoyed blockbuster success with many of their productions for big and small screens alike, Lions Gate has a huge amount riding on the success of young-adult franchises Hunger Games and Divergent, and recent results have been a bit less impressive than the most optimistic of Lions Gate investors had hoped to see.

Lately, if you've seen content revolving around a dystopian young adult-focused universe, Lions Gate has probably been behind it. Yet in addition to its movie franchises, it makes a variety of television productions, including Mad Men and Orange Is the New Black. Still, what motivates investors in Lions Gate is how well its hugely popular movies can perform. With Disney, Fox, and other content producers showing just how valuable content is in the current environment, Lions Gate has a huge opportunity to take advantage of right now. Let's take an early look at what's been happening with Lions Gate Entertainment over the past quarter and what we're likely to see in its report.

Source: Lions Gate Entertainment.

Stats on Lions Gate Entertainment

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$827.7 million

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Can Lions Gate earnings give investors a blockbuster performance?
Investors have gotten more nervous about Lions Gate earnings in recent months, cutting a penny per share from their first-quarter estimates and reducing full year fiscal 2015 projections by about 1%. The stock has dropped 7% since late February.

Lions Gate's fourth-quarter results showed that even though its most valuable film franchises are vitally important for the company's overall success, they aren't all that Lions Gate has going for it. Motion picture revenue climbed 12% because of the success of Catching Fire, the second installment of the Hunger Games series. But television production revenue saw sales jump 17% as well, and television revenue from films, which largely reflected income from the hit Twilight series, rose 7%.

Yet this quarter, Lions Gate suffered some setbacks. The release of Divergent came toward the end of the quarter, and although opening-weekend figures were reasonably strong, they didn't compare to the blockbuster hopes that many investors had for the new dystopian series. In addition, the latest Tyler Perry movie, The Single Moms Club, didn't live up to box-office expectations.


Source: HarperCollins.

Still, Lions Gate is doubling down on Divergent, having chosen to split the third book of the trilogy into two movie releases in order to give it three more films based on the remaining two books. The fact that the original film got solid reviews from audiences only cemented the need for Lions Gate to maximize its opportunity from the franchise. Yet Lions Gate is also moving forward with other ideas, including a new Power Rangers movie and new productions in conjunction with World Wrestling Entertainment.

One area in which Lions Gate could improve is in taking advantage of cross-promotional opportunities. Disney is the master at milking every penny of profit from hit offerings, with its theme parks helping to solidify trends among young customers and its toy licensing and retail stores taking full advantage of merchandising rights. Lions Gate isn't big enough to sport the same prowess that Disney and Fox offer, but it nevertheless has the foundations for what could be even more lucrative franchises going forward.

In the Lions Gate earnings report, look beyond backward-looking numbers to see what guidance the company gives on how the global release of Divergent went earlier this quarter. With so much relying on Lions Gate's future results, you can't afford to look simply at year-over-year comparisons to make decisions about the entertainment company's prospects going forward.

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Dan Caplinger owns shares of Walt Disney. The Motley Fool recommends Lions Gate Entertainment. It recommends and owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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