Please ensure Javascript is enabled for purposes of website accessibility

Why Lionsgate Entertainment Stock Crashed Today

By Anders Bylund - Feb 9, 2018 at 12:43PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The TV and cinema content powerhouse crushed Wall Street's third-quarter targets and reinstated its dividend payouts. Here's why shares fell anyway.

What happened

Shares of Lionsgate Entertainment (LGF-A -0.79%) (LGF-B -0.66%) fell hard on Friday morning. Class A shares -- the ones with voting power -- plunged as much as 16.6%, while the non-voting Class B shares bottomed out with a 15.3% drop. As of noon EST, both stocks were trading approximately 13% lower for the day.

That was the market's response to a solid third-quarter report.

So what

Yes, you read that right.

Adjusted to account for the merger with premium cable TV giant Starz partway through the year-ago quarter, Lionsgate's top-line sales grew 8% year over year to land at $1.14 billion. Adjusted earnings more than doubled from $0.21 per share to 0.48 per share over the same period. Analysts would have settled for earnings of $0.23 per share on sales near $1.08 billion.

So it was a clean sweep against the Street's expectations. Free cash flows nearly quardupled from $41 million to $140 million. Encouraged by the strong cash generation, Lionsgate restarted its dividend program, which had been on pause since the Starz merger was announced.

And yet share prices plunged.

Full house at the movies. The audience is shocked at what's happening on the silver screen.

Image source: Getty Images.

Now what

The answer to this riddle can be found in Lionsgate's earnings call. According to a Seeking Alpha transcript, CEO Jon Feltheimer told investors to expect high growth as the Starz network expands globally -- just not quite yet. Said Feltheimer:

We're on track to meet expectations for the current fiscal year.

As we continue to add scale to our platform by investing in talent and content continue to expand Starz internationally and ramp up our emerging businesses. The growth we had originally anticipated in fiscal 2019 will likely be pushed back a year to fiscal 2020.

We expect this increased investment in content to lead to greater returns for our shareholders, as well as enabling us to resume our strong growth trajectory.

CFO Jimmy Barge provided additional commentary:

Looking ahead, we mentioned last quarter, the changes in our film slate, an opportunistic incremental spending on Starz original programming could result in flatter growth for fiscal 2019. We have now repositioned our film business and increased investment in Starz programming and expect fiscal 2019 will be largely in line with fiscal 2018, before returning to growth in fiscal 2020.

We are confident we will garner solid returns on this investment. However, the timing of those returns will likely fall outside the range of guidance we previously discussed. Accordingly, we think the CAGR for the three years ended fiscal 2020 will more likely be in the mid to high single-digit range, still exceeding industry average growth rates.

So Lionsgate is producing lots of expensive, high-quality content for the Starz segment, in order to drive that asset's growth much faster when the investments start to pay off. The sheer scale of this project is pushing back the starting gate for the actual growth from 2019 to 2020, but investors should be compensated for this delay by a sharper upward trajectory for the long haul.

This is great news for serious investors, in my view. But all the market makers heard was a delayed growth strategy, making them forget all about fantastic third-quarter results and a more ambitious long-term growth trajectory.

That looks like a big mistake. This drop is not a harbinger of doom, but a wide open buy-in window.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lions Gate Entertainment Corp. Stock Quote
Lions Gate Entertainment Corp.
$9.47 (-0.79%) $0.07
Lions Gate Entertainment Corp. Stock Quote
Lions Gate Entertainment Corp.
$9.00 (-0.66%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.