Expectations: Lions Gate (NYSE:LGF) has missed EPS expectations seven times in the past four years. No, that wasn't a typo, seven times. Even the quarter the ever popular Hunger Games movie was released was a miss. Not until after the movie went to DVD did LGF report consistent positive earnings. In fact, the only other movie Lions Gate has released that broke the $100 million gross barrier was "The Expendables". Divergence could be the key for Lions Gate looking forward; more on that later.
Fundamentals: Lions Gate trades with a current P/E of 68.81, a forward P/E of 16.68, a P/S of 1.18, and a PEG ratio of 1.13. That current P/E would make many investors run, but trust me you'll want to hear the rest. The consumer services sector trades with a current P/E of 17.4 and a forward P/E of 17.5. Meanwhile, the S&P 500 trades with a current P/E of 20.5 and a forward P/E of 17.3. It doesn't take a rocket scientist to figure out that LGF is overvalued if you use the current P/E ratios to place a value on Lions Gate.
The forward P/E of 16.68 comes in below both the industry and S&P 500 averages. Combine that with a fairly valued P/S ratio and PEG ratio and we're searching for something else to signal a move for those fundamentals either way. The drastic difference between the current and forward P/E tell us Wall Street is expecting something huge on the horizon, and that something huge is the second installment in the Hunger Games saga. We have something else that could help make these current valuations and the stock look dirt cheap.
The Story: Marsha! Marsha! Marsha! Just about any other movie in the Lions Gate catalog is probably screaming that, as none of them have earned even 25% as much as Hunger Games. It's fair that LGF stock would be tied so closely to their most successful series, and that is with only one installment in the books. The Street is attempting to gauge consumer interest in the series going forward any way possible. They have even attempted to measure how successful the movies will be by looking into the sales of the books, which happen to be slowing at the moment. Slowing sales of Hunger Games books is to be expected as the consumer is between movies releases and advertising barrages. The next installment of the Hunger Games saga is due to come out in November of this year, and the market is starting to price that in to the stock right now.
However, there is another possible mega-hit on the horizon for LGF. "Divergent" is the name of the series. Like the Hunger Games, it dives into the role of society in people's lives. According to Lions Gate executives, the Divergent book series is approaching the three million copies sold mark. At the current phase Divergent is actually on the same track and same amount of sales as Hunger Games at this point in its release. If Divergent is able to pull in even half of the Hunger Games, it would provide LGF with two massive box office successes for several more years.
How to Play It: LGF has a very clean balance sheet. There are minimal "bad assets" such as goodwill assets, deferred long term assets, and intangible assets. Hunger Games comes out in November and Divergent comes out in spring 2014. With one already wildly successful movie franchise underway, and possibly another in the making, LGF could just be starting a massive run. My personal 52-week price target: $31.00.
Additional disclosure: Always consult with your own registered financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.