3 Reasons Why Lions Gate Stock Shouldn't Be Losing to the Market

With six months gone, a Fool looks at the prospects for Lions Gate stock for the remainder of 2014.

Jul 13, 2014 at 11:00AM

Lions Gate Hunger Games Mockingjay Part

The Hunger Games: Mockingjay Part 1 comes to theaters in November. Image source: Lions Gate.

Shares of Lions Gate (NYSE:LGF) stock are off more than 11% this year because investors believe, wrongly, that there's no life for the stock after The Hunger Games franchise comes to an end.

Catching heat
Look at what happened on May 29. Investors dumped Lions Gate stock when the studio said that March quarter revenue fell to $721.9 million from $785.7 million in last year's fiscal Q4, well below the $823.6 million analysts were expecting. (The studio ends its fiscal year just as most companies are closing the first quarter.)

Never mind that Divergent had only just started its run in theaters, or that Lions Gate set records for TV sales last year, or that the studio is managing to make tentpole features for a fraction of what its peers spend. A miss is a miss, and traders ran for the exits. Stupid.

A winner in the making
They'll come back the next time Lions Gate beats expectations. When will that be? I've no idea... but if you're a long-term investor, there are three good reasons to be betting on Lions Gate stock right now:

1. Smart spending. CEO Jon Feltheimer and his team have a history of doing more with less. Foreign pre-sales for Divergent cut the studio's out-of-pocket production costs to roughly $15 million. Gods of Egypt -- a $140 million tentpole due for a Feb. 2016 release -- won't even cost that much. Pre-sales and tax incentives in Australia, where the film is shooting, cut Lions Gate's total exposure to $10 million, Feltheimer said in a call with analysts.

Of course, this strategy isn't unique to Lions Gate. Time Warner spent $225 million to produce Man of Steel, recouping roughly $170 million of that via product placements. Yet even that looks bloated when compared to Lions Gate's average spend, which Variety pegs at just $13 million per movie. Capital allocation has become a competitive advantage.

2. Franchise potential. Meanwhile, Feltheimer and team have taken a lesson from larger studios in pursuing franchises. Divergent and The Hunger Games are the biggest names, of course. Others include Now You See Me, a 2013 summer winner that's getting a sequel, Gods of Egypt, and Power Rangers, a popular kids TV franchise. Lions Gate acquired the live-action license in May.

Careful planning should help with each of these efforts. Take Divergent. In talking up the movie in Lions Gate's Q4 call, Feltheimer said the studio planned on $275 million in worldwide grosses for the first film. Box Office Mojo pegs the total at $269.2 million as of this writing.

3. An expanding portfolio. Feltheimer and team are also diversifying beyond the cineplex. Peter Levin has joined the company to build video game franchises, including titles that relate to its most popular movies. TV, too, is a catalyst. Production revenue grew 18% last year to $447.4 million, a new record for the segment. Syndication will help set new marks in the years to come.

"As I look from today through 2017, probably looking at margins going from around 7% to probably doubling around 14% and revenue [from television] increasing about 50% in that period of time," Feltheimer told analysts, citing syndication deals for Nurse Jackie, Anger Management, Orange Is the New Black, and Tyler Perry's House of Payne as key drivers.

The Foolish bottom line
Lions Gate is, in many ways, a typical movie-making, franchise-chasing, TV-producing studio. But the similarities end there. While others reach deep to fund massive projects, content to lose money at the box office because DVD and Blu-ray sales will make up the difference, Lions Gate makes every dollar count. You don't often see that in Hollywood's culture of excess, but it's common to companies that deliver for their shareholders.

That's why, despite the sell-off, I like Lions Gate stock for the long term. Do you agree? Disagree? Sound off in the comments box below.

How to profit when your cable company pulls the plug
A $2.2 trillion shift in how we acquire and consume entertainment in under way. And everyone, even Lions Gate, is feeling the effects. But your cable company has the most to lose. Three other companies have the most to gain. Who are they? Click here for their names. Hint: They're not Netflix, Google, and Apple.

Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Time Warner at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

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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