Lions Gate Entertainment Crashes: Buying Opportunity or Time to Run?

Lions Gate announced disappointing financial performance last week, but the business is still solid, and investors seem to be overreacting to the negative news. The dip in Lions Gate could be a buying opportunity for long-term investors.

Jun 2, 2014 at 5:16PM

Lgf

Source: Lions Gate.

Lions Gate Entertainment (NYSE:LGF) fell by more than 10% last week after reporting disappointing financial performance for the quarter ended on March 31. Is the recent dip in Lions Gate a buying opportunity, or is the worst yet to come for investors in the company?

A weak quarter
Sales during the quarter ended on March 31 came in at $721.9 million, an 8% decline versus $785.7 million during the same period in 2013. The number was materially below analysts' expectations of $823.6 million for the quarter.

GAAP earnings per share were $0.33 during the quarter, versus $1.10 in the year-ago period and $0.40 forecasted on average by Wall Street analysts. When excluding $0.08 per share in stock-based compensation and $0.01 per share related to a loss on debt extinguishment, adjusted diluted earnings per share came in at a considerably better $0.42.

Sales and earnings are always hard to forecast in the movie business, and the last quarter was a particularly weak one for Lions Gate, since the company is not benefiting from its blockbuster Hunger Games franchise during the period, and its new successful launch, Divergent, was released only 10 days before the end of the quarter.

Still, even if analysts were already projecting lackluster performance during the quarter, Lions Gate did not manage to beat such a low bar.

A strong year
Things don't look that bad when taking a longer-term view, though. The fiscal year ended on March 2014 was a generally solid one for Lions Gate, driven mostly by the huge success of The Hunger Games: Catching Fire, which grossed $865 million at the worldwide box office. Now You See Me performed notoriously well, too, grossing $350 million in global box office.

Sales during the year fell to $2.6 billion versus $2.7 billion in fiscal 2013, as the company launched 13 new releases in fiscal 2014, compared to 19 in the prior year.

But Lions Gate's strategy of being more selective in terms of productions is yielding solid results on the profitability front as the company is generating expanding profit margins: adjusted EBITDA was $370.8 million during the year, a 12% increase versus $329.7 million in adjusted EBITDA during fiscal 2013 and a historical record for Lions Gate.

Adjusted net income was $217.9 million during fiscal 2014, or $1.58 per share. This was another record for the company, and a big increase versus the adjusted net income of $136.5 million, or $1.01 per share, in the prior year.

A promising future
As opposed to bigger and more aggressive studios, Lions Gate is focused on keeping production expenses under control when launching new movies. This means the company does not need every new film to be a huge success for it to be profitable. Importantly, when it hits a home-run like Hunger Games, profitability can be enormous for Lions Gate.

Hunger Games is an extremely valuable franchise that should continue generating big results for Lions Gate over years to come. The company will be launching a new Hunger Games movie in November, and it's also working on a Hunger Games video game as well as exploring the possibility of a theme park attraction.

Divergent is off to a strong start, and Lions Gate could make solid profits from this franchise even if it does not achieve the same level of outstanding success as Hunger Games.

Revenues in the television segment increased by a big 18% to a record $447.4 million during fiscal 2014, as Lions Gate continues on the right track with names such as Mad Men, Orange Is the New Black, and Nashville, among several others.

Lions Gate is betting on franchises and proven tittles to generate recurrent and predictable financial performance, and CEO Jon Feltheimer is quite confident about the company's prospects:

The trajectory of our business, the depth of our content pipelines and the ongoing generation of predictable income from our film franchises, television properties and filmed entertainment library continue to give us excellent long-term visibility.

Foolish takeaway
The studio business is always risky, especially when it comes to a relatively small name such as Lions Gate. However, the company is still solid from a fundamental point of view, and the market seems to be overreacting to negative short-term news. For investors willing to withstand the volatility, the upside potential in Lions Gate Entertainment may outweigh the risks.

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Andres Cardenal has no position in any stocks mentioned. The Motley Fool recommends Lions Gate Entertainment. 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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