Has Lions Gate Lost its Roar? (LGF)

Lions Gate, an independent movie and television producer, took a hit in earnings today. However this up and coming company shouldn’t be benched from the ball game just quite yet.  With an ever-growing film arsenal, this lion is bound to roar once again…

The Earnings Situation

Lions Gate reported third quarter earnings of $0.02 per share today, missing analyst estimates of  $0.05.  Net income fell roughly 88% to $2 million. This sounds pretty bad I know, but there is a diamond in the rough here – third quarter revenue did spike 14% to $290.9 million.  So what’s with the bad earnings?

Lions Gate has recently decided to expand its film bank to 20 movies.  Direct operating and distribution/marketing costs associated with these new film ventures rose 23.8% and 25.7% respectively. This subtracted about $51 million from the bottom line and as we can see – affected net revenue greatly.

However, let’s not forget that Lions Gate has put out seven hit movie releases in a row:  The Eye, Rambo, Saw IV, Why Did I Get Married?, 3:10 to Yuma, Good Luck Chuck and War.

The company did take a hit with the production expansion, but if Lions Gate keeps picking winners – there is no telling how much profits will pop within the next few quarters.

Business is Booming

Aside from the increased operating and marketing costs, just about every avenue of income for Lions Gate increased in revenue last quarter.  Let’s take a look at the different segments and how each performed:

• Movie Division – brought in $254 million this quarter compared to $221.6 million last year.

• International Division – brought in $53.8 million this quarter compared to $27.6 million a year ago.

• Entertainment Backlog Division – brought in $416.6 million this quarter compared to only $347.4 last year.

• Television Production Division – brought in $36.8 million compared to $32.9 million last year.

• Home Entertainment Division – brought in $105 million compared to $113.6 million last year.

Four out of the five Lions Gate divisions increased its revenues from the same quarter last year.  The only division that last money was home entertainment, and this was still considered to be strong.  You can’t argue with the numbers – Lions Gate is raking in the dough.

The Bottom Line

Let’s cut the fat here – Lions Gate is doing what any growing company does when it sees the true potential of its business – they expand.  Of course, during the expansion phase business is bound to struggle a little bit, especially in the movie business when marketing and over inflated, movie star salaries are factored into the mix. 

Just take a look at each division’s performance – there is significant revenue coming in from almost every direction.  Not to mention that the recent decision to expand its number of films in production will, without a doubt, spike profits during the upcoming quarters.  Lions Gate has now put out seven hit releases in a row and hopefully they can keep this run alive.  The stock has been beaten down during the last six months and is looking extremely undervalued.  Lions Gate (LGF) is a strong short-term (think 9-month) investment.

Cheers,

Jack Aubrey
Senior Equity Analyst, Bourbon & Bayonets