Source: Lions Gate
After seeing its shares pop up nearly 3% on May 29, 2014, shareholders of Lions Gate Entertainment (LGF-A -0.89%) were hit by a 12% price decline on May 30. Much to investors' chagrin, the motion picture company could not match analyst expectations for the fourth quarter of its 2014 fiscal year in terms of either revenue or earnings. With shares of the business trading so low, is now a prime time to jump into a position? Would the Foolish investor be better off picking up a piece of DreamWorks Animation SKG (DWA) instead?
Lions Gate just couldn't make Mr. Market happy
For the quarter, Lions Gate posted revenue of $721.9 million. In addition to being 8% lower than the $785.7 million the company reported the fourth quarter of 2013, its top line came in 12% below the $823.6 million analysts expected it to.
For the year, the company saw its revenue fall a more modest 3% from $2.7 billion to $2.6 billion. This decline came from the company's Motion Pictures segment and has been largely attributed to the business releasing just 13 titles for the year compared to the 19 it boasted last year.
Source: Lions Gate
From a profitability perspective, the firm's numbers were even worse. For the quarter, Lions Gate reported earnings per share of $0.33, down significantly from the $1.10 management reported last year and nearly 18% lower than the $0.40 Mr. Market wanted to see.
Lions Gate's fiscal year earnings also came in lower, with the company bringing in a profit of $1.04 compared to the $1.61 management reported a year earlier. This was due in part, to lower sales but can also be chalked up to costs that rose in relation to revenue.
For the year, the company saw its direct operating expenses climb from 51.3% of sales to 52.1%, while its general and administration expenses jumped from 8.1% of sales to 9.7%. A 3% increase in shares outstanding further diluted the company's profits on a per-share basis.
How does Lions Gate stack up to DreamWorks?
Over the past five years, Lions Gate has had a pretty astounding run. Due to the success of blockbusters like Twilight and The Hunger Games, the company has seen its revenue shoot up 77% from $1.5 billion to $2.6 billion while its net income has converted from a loss of $19.5 million to a gain of $152 million. While higher sales were due to more popular films, its rise in profits stemmed from a reduction in costs, primarily from its selling, general, and administrative expenses, which dropped from 43.6% of sales to 37.8%.
LGF Revenue (Annual) data by YCharts
During its most recent comparable timeframe, rival DreamWorks has been in a bit of a slump. Between 2009 and 2013, the entertainment business has seen its revenue fall almost 3% from $725.2 million to $706.9 million. In spite of seeing its sales hit an all-time high of $784.8 million after the success of its hit film Shrek Forever After in 2010, the company has been trying to find a way to grow without milking the franchise dry.
From a profitability perspective, DreamWorks has been in even more trouble. Over the past five years, the company's net income plummeted 64% from $151 million to $55.1 million. This has been due, to some extent, to the company's falling revenue but can also be attributed to its cost of revenue climbing from 59.8% of sales to 63.6% while its selling, general, and administrative expenses soared from 13.2% of sales to 27.2%.
Foolish takeaway
Based on the data provided, it's understandable why Mr. Market is reacting the way it is. Not only did Lions Gate see its revenue and profits fall year-over-year, but it handily missed expectations. However, if investors look at the company's long-term success it's hard to argue that now isn't a good time to consider a stake in the business.
In addition to having a better track record than DreamWorks, Lions Gate is currently trading at a 22% discount from its 52-week high. Taking these aspects into consideration, the Foolish investor would be foolish, not Foolish, to pass up the company as a prospect.
