The cast of The Hunger Games: Mockingjay Part 2. Source: Lions Gate Entertainment. 

Shares of Lions Gate Entertainment (NYSE:LGF-A) are up roughly 21% year to date. Will the rally continue after the company reports second-quarter results on Monday, or are worse days ahead? A lot depends on how well the business has performed. Here's a closer look at what Lions Gate has achieved over the trailing 12 months: 

MetricFQ1 2016FQ4 2015FQ3 2015FQ2 2015
Revenue $408.9 million  $646.1 million $751.3 million $552.9 million
Earnings from continuing operations $40.7 million $19.6 million $98.2 million $20.8 million
Adjusted EPS $0.26 $0.14 $0.65 $0.15
Cash from operations ($30.9 million) $259.6 million $44.9 million ($195.3 million)

Source: S&P Capital IQ.  

As the table indicates, Lions Gate is a cyclical business that's driven at least in part by theatrical releases. November and March releases help push fiscal third- and fourth-quarter figures higher, pushing a good portion of the upstart studio's cash generation into the back half of the year. Big studios tend to be less subject to this degree of seasonality.

Walt Disney (NYSE:DIS) is a good example. The House of Mouse reported between $1.86 billion and $3.33 billion in cash from operations over each of the past four quarters, a 79% difference between the high and the low that looks mild when compared to Lions Gate's herky-jerky movements over the trailing 12 months.  

Disney benefits from having a wider array of businesses. From cable and broadcast television distribution to films, original TV programming, and the world's largest and most successful brand licensing operation, the company has a variety of ways to generate revenue, profit, and cash flow. Lions Gate is still building its portfolio, which is probably clear when you look at how the key figures measure up year-over-year:

Lions Gate Growth RatesFQ1 2016FQ4 2015FQ3 2015FQ2 2015
Revenue (9%)  (10.5%) (10.6%) 10.9%
Earnings from continuing operations (6%) (60.2%)  10.6% 4,015%
Adjusted EPS (11%)  (58%) 11.8% 3,979.1%
Cash from operations Not material 143.3% 27.3%  Not material

Source: S&P Capital IQ

The hit-driven nature of Lions Gate's business has taken a toll on growth in recent quarters. As a long-term investor, I'm OK with that. What I'm looking for is evidence of sustainable gains in the overall business, and these three areas in particular:

  1. Continued gains in television. While Lions Gate doesn't operate channels in the same way that Disney does, television production and distribution are a large and growing part of the business. In fiscal Q1, television production revenue improved 14% to $133.6 million. A 73% increase in international distribution revenue from the first three seasons of Orange Is the New Black was partly responsible for the win. Management is aiming for more catalysts like this, signing an international distribution deal with Skydance Media in early October. The studio is best known for producing Emmy nominee Grace and Frankie and Manhattan.   
  2. A rich and growing backlog of movie and TV development projects. Lions Gate is well-known for strategic but fiscally conservative bets on new projects. Recent tie-ups include a deal with Take-Two Interactive (NASDAQ: TTWO) to adapt the horror comic book series Z-Men for the big screen. Financial terms weren't disclosed, but the deal fits nicely when you consider Lions Gate's history with horror franchises such as Saw. (Z-Men is based on the horror classic Night of the Living Dead, a cult classic that was also a commercial success in its time.) Also, movies account for the vast majority of Lions Gate's revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA). 
  3. An improved balance sheet. Fiscal responsibility is Lions Gate's key advantage. The best way to measure the company's strength in this area is to watch the balance sheet. In fiscal Q1, Lions Gate had $196.6 million in cash and short-term investments and $499 million in long-term investments to go with $1.45 billion in total debt. 

Lions Gate Entertainment reports third-quarter results on Monday, Nov. 9, after the market closes.

If Tim Beyers is a Leo, does that make him the lion in winter? Maybe. Regardless, he's a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission and owned shares of Disney at the time of publication. He was also long January 2017 $85 call options on Disney stock. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool.

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