Media producer and horror junkie Lions Gate Entertainment Group
Lions Gate's first-quarter loss was attributed primarily to "increase in theatrical marketing expenses" as it is on the cusp of a slew of new releases. Additionally, films released during the quarter, including Hostel Part II, The Condemned, and Delta Farce, are posting disappointing results. Despite these developments, total quarterly sales advanced 15% on a big jump in international revenue from the likes of non-family friendly Saw 3, and the latest incarnation of Dirty Dancing, which is apparently causing a stir in Germany and the U.K. as it makes its way to the United States.
Television revenue also increased sharply as films make it to TV, while related production revenue almost tripled on a sixth season of The Dead Zone. The recent acquisition of syndication subsidiary Debmar-Mercury brought benefits from popular shows such as South Park and House of Payne.
Despite the near-term film weakness, management has high hopes for its next group of films, including Saw 4, to continue the successful horror franchise. It is still targeting total annual revenue of $1.1 billion and free cash flow of about $100 million. Based on the current share price and shares outstanding, the projected price to free cash flow yield is quite low at under 12.
During the earnings conference call, management announced its disappointment in how the Lions Gate share price is performing as of late. It has an approved buyback program in place, but hasn't recently elected to buy back shares or pay a dividend with the $235 million in cash and investments on the balance sheet. It could also pay down long-term debt to lower interest expense.
The share price is definitely reasonable based off projected free cash flow, and Lions Gate has a compelling business model of focusing on independent films that require a fraction of the budget that blockbuster pictures demand. This operating philosophy makes it easier to turn a buck on moderately popular films, and minimizes the downside should a film like Delta Farce flop. Additionally, the company owns an extensive film and television library, which leads to high-margin revenue from DVD sales and replays on TV.
Lions Gate could also pique the interest of a strategic acquirer with an arm in media production, such as News Corp
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy enforced by a ferocious polar bear.
