Independent movie maker Lions Gate Entertainment  (NYSE:LGF) reports its fiscal Q2 2008 earnings results Friday afternoon. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Sixteen analysts watch Lions Gate, giving it 13 buy ratings, two holds, and a sell.
  • Revenues. On average, the analysts expect to see sales rise 29% to $280.9 million.
  • Earnings. Last year's Q2 loss is expected to more than double to $0.32 per share.

What management says:
Reviewing Lions Gate's recent 8-K filings for clues to Friday's news, I can't say I was thrilled with what I found. Seems the movie maker intends to saw open the stock dilution cookie jar, and pour 14 million shares' worth of options and stock grants onto the market, inflating its 2004 "performance incentive plan" by 7 million shares of each. Total damage: Current shareholders could be diluted out of 12% worth of their ownership in the company when and if the new grants are implemented. Scary.

What management does:
Two successive quarters of declining gross margins have Lions Gate now operating in the red on both an operating and net basis as of its most recent quarter. Considering the dependence on many of Lions Gate's franchises, that seems appropriate. For example, Lions Gate's October trick pony -- its successful Saw series -- should boost current quarter revenue. However I cannot help but notice that more stable and mainstream rivals such as Disney (NYSE:DIS), Sony (NYSE:SNE), Time Warner (NYSE:TWX), and especially DreamWorks Animation (NYSE:DWA) all manage to post operating profits. Even niche player Marvel (NYSE:MVL) (which, by the way, I own) earns strong double-digit operating margins on its offerings.

Granted, most of those larger players have revenue streams that Lions Gate lacks: theme parks at Disney, camcorders at Sony, news magazines for Time Warner, and comic books for Marvel. Still, a Fool has to wonder if Lions Gate might be well-advised to partner with someone with a better track record of making money in this business.

Margins

3/06

6/06

9/06

12/06

3/07

6/07

Gross

52.3%

54.6%

55.7%

56.7%

55.9%

55.2%

Operating

2.5%

4.2%

3.4%

5.1%

4.9%

(0.1%)

Net

0.6%

2.6%

2.6%

4.3%

2.8%

(2.2%)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In other news, Lions Gate announced in September that it will be laying out $56.3 million in cash and stock -- mostly cash (perhaps the sellers didn't want to get diluted right out of the gate) -- and paying off $6.6 million in debt, to acquire independent production and distribution company Mandate Pictures. The acquisition looks like a good fit with the Saw-maker. Mandate was the force behind the two-part move of Sarah Michelle Gellar (that's Buffy, the vampire-slayer, to you) to the big horror screen: The Grudge, and The Grudge 2.

I wish I could tell you whether the deal was as good a fit financially, but Lions Gate kept mum on the numbers. About all I've been able to learn is that, according to boxofficemojo.com, The Grudge cost $10 million to produce, and grossed $110 million domestically (nice!), while its sequel cost twice as much to make, but grossed just over one-third at the box office (horrors!) That's probably not what Lions Gate wants to see since it thrives on franchise movies and actors.

Let's play a game. Will investors be subjected to the cruel games of negative margins and stock dilution? Stay tuned to see if the earnings report survives.

Disney, DreamWorks, and Marvel are all proud members of our Motley Fool Stock Advisor portfolio. Why do we prefer these movie makers? Preview the market-beating newsletter for 30 days, absolutely free, and find out.

Fool contributor Rich Smith does not own shares of any company named above. Why do we tell you this? Because The Motley Fool has a disclosure policy.