This Stock’s Rally Could Stretch Beyond 2014

Cover of "Catching Fire (The Second Book ...

Cover via Amazon

Lions Gate Entertainment (NYSE: LGF), one of the largest home entertainment and feature film companies, is up more than 60% this year. The company is riding on its two major releases in 2012, and seems to be heading even further based on this year’s schedule of events.

The Santa Monica, CA-based, theater company is also growing revenue and earnings at a remarkable rate, which signifies the solid returns from its most recent feature film releases along with a various TV series aired by some of the largest networks. Lions Gate is renowned for the production of motion picture films such as The Twilight Saga, The Expendables, and the Hunger Games. The company also engages in TV series production featuring Weeds, Mad Men, Anger Management, and Nashville, among others.

Fiscal year 2013 revenue up 71%

Lions Gate reported Q4 and FY2013 results late in May, beating analyst estimates in all aspects. Notably, the company’s revenue rose a massive 71% to $2.71 billion compared to last year’s $1.59 billion. EBITDA came at $329.7 million, up from $71.6 million reported in 2012, while non-GAAP earnings rose from a loss of $39.1 million, or $0.30 per share, reported last year to a net income of $232.1 million, or $1.73 per share.

Adjusted earnings were $190.1 million, or $1.41 per share, compared to last year’s loss of $13.1 million, or $0.10 per share. The company’s free cash flow also rose from last year’s deficit of $86.9 to a surplus of $280.5 million. Deferred revenue not included in the results amounted to $1.1 billion.

“We completed a stellar fiscal 2013 with an outstanding fourth quarter that reflected strong contributions from our young adult franchises as well as the rest of our theatrical slate and our home entertainment and international businesses,” said Lions Gate Chief Executive Officer Jon Feltheimer. “We are performing ahead of plan for all of our metrics, and we’re pleased with the financial strength of our diverse portfolio of businesses and our strong and growing momentum building Lions Gate into a next generation global content leader.”

Lions Gate generated $2.33 billion from its Motion Picture segment in Fiscal year 2013, up 96% from the previous year. This unit accounts for 86% of Lions Gate revenue with Television production contributing just 14%.

The Hunger Games: Catching Fire should be a massive upside

The Hunger Games, released on March 26, 2012, earned $686.5 million, making it the highest earning motion picture film released outside the holiday season. Overall, The Hunger Games is the thirteenth highest earning film ever released. The next part of the film, The Hunger Games: Catching Fire, is scheduled for release on November 22 this year, coinciding well with the holiday season.

Being a follow-up to the first part, it should attract more audience based on the performance of its predecessor. Additionally, the holiday season should also boost the film’s earnings, which could push it right to the top of the earnings list.

Additionally, the current year is well packed with several other releases. There will be seven motion picture film releases in 2013, with six more to follow in 2014 as per the current schedule.

Competition

The release of Hunger Games: Catching Fire will face competition from Paramount Picture’sThor: The Dark World. Paramount is controlled by Viacom (NASDAQ: VIAB), an entertainment content company based in New York. The company connects with audiences through compelling content on television, motion picture, online, and mobile platforms, and just like Lions Gate, it operates in two segments, Media Networks and Filmed Entertainment.

Viacom’s most recent quarter earnings fell 18.3% as one of its business units, Nickelodeon, continued to struggle. However, the company’s margins are far superior to those of Lions Gate. Viacom’s operating margin in the most recent quarter stood at 27.56% compared to Lions Gate’s 7.43%; profit margins stood at 16.33% and 1.81%, respectively. However, Lions Gate’s revenue grew an overwhelming 130.2% compared to Viacom’s decline of 5.9%.

Meanwhile Rupert Murdoch’s News Corp. (NASDAQ: NWSA) through its distribution channel 20th Century Fox, will also be releasing numerous films through the year. Notably, the company is slated to release the film, The Counselor, in wide screen on November 15, just a week ahead of Lions Gate’s Hunger Games 2. Similar in genre, this is likely to compete directly with Hunger Games, but the one-week delay might play a critical part in eliminating that threat.

News Corp. is a big company with investments in several media networks, which gives it a market cap of more than $70 billion compared to Lions Gate’s $3.8 billion. Murdoch’s company has an operating margin of 16.15% and a profit margin of 16.68%, thereby trumping Lions Gate.

The bottom line

Lions Gate finds itself in a field which has attracted media tycoons like Rupert Murdoch and John Malone, who have put in a lot of money in acquiring motion picture film companies. Viacom and News Corp. are not essentially Lions Gate’s direct competitors, but rather, their subsidiaries and franchises. This means that while Lions Gate’s share performance could be determined by the impact caused by a film release, this might not be the same case for News Corp and Viacom, which have a diversified business.

That said, Lions Gate’s release of Hunger Games: Catching Fire should result in a major upside. The potential revenue expected from the release is enormous, and coupled with other scheduled releases, fiscal year 2014 is set to be yet another rally for the stock. The releases of Hunger Games 1 and Twilight Saga, among others, have contributed to the stock’s current rise of more than 225% since Jan. 9, 2012. Therefore, there is every reason that the coming releases should provide the stock with further momentum.

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