Opening the Lions' Floodgates

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With all the hubbub aboutPixar (Nasdaq: PIXR) and Marvel Enterprises (NYSE: MVL), you may not have heard of Lions Gate Entertainment (NYSE: LGF) as an entertainment industry investment. But surely you've heard of Monster's Ball, Fahrenheit 9/11, and most recently SAW, which hacked its way to third place on the Halloween weekend's box office charts. The independent producer and distributor has made a name for itself by turning what other studios cast off into runaway hits. Fahrenheit 9/11 helped put Lions Gate on the map, and the string of successes has shown that it is not a one-hit wonder.

However, Lions Gate's biggest assets are not just in box offices. One strong point is its 8,000-title-strong library, which generates a steady stream of revenue. Sony's (NYSE: SNE) purchase of MGM (NYSE: MGM) shows the importance placed on enormous libraries, and Lions Gate has one of the largest in the industry. This library will also fuel the company's video-on-demand effort, CinemaNow, which if successful would provide yet another recurring revenue stream.

The company has also demonstrated success in selling DVDs, most notably The Punisher, a DVD of the movie it co-produced with Marvel Studios. The title sold nearly 2 million units in its debut week. Lions Gate has also signed a deal with Marvel to collaborate on direct-to-DVD animated movies. Direct-to-video is a core aspect of Lions Gate's business -- the company expects to realize more than half its fiscal 2005 revenue from its planned release of 84 titles.

With second-quarter net income of $8.3 million, or earnings per share of $0.08, Lions Gate absolutely mauled expectations and is looking forward to a strong fiscal 2005, projecting net income of $25 million on revenue of $750 million. Because of the depth of its library, the company has often been seen as an acquisition target, but Lions Gate can definitely stand on its own four feet. Insiders have great faith in the company's prospects, too -- Lions Gate boasts nearly 30% insider ownership, with three officers ponying up a total of $1 million in share purchases at the beginning of the year.

Lions Gate has caught moviegoers' eyes on the big screen. Now that the company is profitable and set to roar into 2005, it's time for investors to sit up and pay attention, too.

For related Fool Takes, see:

• Lion's Gate on Fire
• Pixar's Box Office Story
• Marvel Gets Direct
• Libraries Aren't Boring to Sony

Both Marvel and Pixar are Motley Fool Stock Advisor recommendations.

Fool contributor Tim Goh owns shares in Marvel Enterprises.