Shares of Lions Gate Entertainment (NYSE:LGF) soared in the two years leading up to its peak last September, gaining 500% on the strength of its Hunger Games series and a key acquisition that gave it the Twilight franchises. Since then, however, the stock has cooled off as the production studio missed earnings estimates in its most recent report, and dipped last November when Hunger Games: Catching Fire underperformed box office expectations in its opening weekend.
With shares still selling for a relative discount compared to its peak last September, is now a good time to make a bet on Lions Gate?
Will Lions Gate Catch Fire?
Profits for movie studios like Lions Gate are highly volatile as the performance of box office releases are hard to predict, and results can swing wildly from quarter to quarter depending on release schedules.
To determine in what direction Lions Gate is headed, let's take a look at where its revenue comes from. In fiscal 2014, which ended March 31, the company brought in $2.63 billion in revenue, $2.18 billion, or 83%, of which came from its motion picture segment. Television, meanwhile, brought in $447 million, or the remaining 17% of the company's sales. While television is a steadily growing and important source of income for Lions Gate, and the company counts over 30 TV shows including critically acclaimed series Mad Men and Orange Is the New Black among its arsenal, motion pictures make up the bulk of the company's revenue.
Last year, sales from motion picture theatrical releases actually declined 2% to $524.7 million, but that was because the number of releases fell from 19 to 13.
On a per-release basis, sales improved from $28.1 million to $40.3 million. Catching Fire was by far the company's best performer, grossing $865 million at the box office, just missing Lions Gate's stated goal of $900 million.
Still, past performance is not a good indicator of a future results in an industry like this one, and it's important for investors to have an understanding of Lions Gate's pipeline. The company releases an average of 15 movies a year, and currently has 10 on the docket for fiscal 2015, the most important being Hunger Games: Mockingjay Part 1, which is due out in November. Another notable scheduled release is Expendables 3, which will come out August 15.
Since current leadership took over in 2000, Lions Gate has increased revenue more than 15 times, growing both organically and through acquisitions. Its 2012 acquisition of Summit entertainment, which produced the Twilight series helped send the company's share price skyrocketing.
In addition, Lions Gate has stepped up its efforts to return capital to shareholders recently by initiating a $0.05 quarterly dividend as of last December, good enough for a 0.7% dividend yield, and also increased its share buyback authorization to $300 million in December. At its current valuation, that repurchase amount would reduce shares outstanding by about 7.5%.
Finally, the emerging streaming platforms such as Netflix have increased demand for content, and Lions Gate has taken advantage of the new medium by partnering with the video streamer to produce Orange Is the New Black. The studio has also teamed with Hulu to produce Deadbeat.
As the TV and movie franchises in its library continue to grow, Lions Gate's economics are set to look even better. Looking ahead, CEO Jon Feltheimer expects revenue to increase 25% over the next three years as its profit margin doubles to 14% and TV revenue expands by 50% thanks to increasing syndication sales from its hit shows. Lions Gate also has at least one more Hunger Games movie in the pipeline after this November's release, Mockingjay Part 2. Feltheimer's forecast may seem bold, but if it comes true, Lions Gate shares will look like a steal at today's prices.
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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Lions Gate Entertainment and Netflix. The Motley Fool owns shares of Netflix. 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.