Shares of Lions Gate (LGF) have been trending lower this fall and recently following the release of The Hunger Games: Catching Fire. Shares have broken through the 200dma and are down 20% from a month ago. It seems like the stock has been in the "sell the news" mode since Catching Fire was released. At these levels the company is an extremely attractive buy.
Despite what anyone tries to spin, Catching Fire is an extreme success. As I wrote in a prior article, where Catching Fire was going to shine was in the international markets. At the end of the run, the original Hunger Games movie grossed only $283 million worldwide (per boxofficemojo.com). Only 3 weekends into Catching Fire's run the movie has already grossed $336 million internationally. This brings the total of Catching Fire to $672 million, which is almost equal to the Hunger Games total run of $691 million. Lions Gate did an excellent job of getting audiences in the international markets excited for the movie and this will pay off for the next two installments down the road.
Lions Gate has a larger pipeline than just the Hunger Games franchises. This week, Tyler Perry will be releasing another movie in the Madea franchise, A Madea Christmas. The Madea franchise has performed consistently well, averaging $64 million per movie in the franchise on modest budgets.
The biggest movie to look out for on the horizon is the release of Divergent in March. This could very well be the next blockbuster movie franchise for Lions Gate. The movie is based upon the first of three books in the series by Veronica Roth and could bolster the movie pipeline down the road if the film is a success. In social media surveys, Divergent is tracking at the top of films being released in the first half of 2014.
Another potential blockbuster is the next installment in the Expendables franchise. This edition adds even more star power to the cast including Mel Gibson, Harrison Ford, Antonio Banderas and Kelsey Grammer. This movie will look to meet or beat the $300 million worldwide total of Expendables 2.
More films in the future pipeline include the sequel to the surprise blockbuster of the summer, Now You See Me. It has been green lit for a projected 2014 sequel after the original grossed over $350 million worldwide. Other high-profile films in the works include action-comedy Mortdecai starring Johnny Deep, Gwenyth Paltrow and Ewan McGregor, Gods of Egypt starring Gerard Butler and Geoffrey Rush. These high profile films are rounded out by Mockingjay Part 1 and Mockingjay Part 2.
As you can see, there is still plenty in the movie pipeline besides the Hunger Games franchise. It should also be noted that 25 out of the last 30 films Lions Gate released were profitable according to the last earnings call.
Lions Gate isn't just about movies either. The studio operates a very successful television unit that produces hit shows such as Mad Men, Nashville and Orange is the New Black which is the most watched original series on Netflix. Also in the works are The George Lopez Show and a new series with Martin Lawrence and Kelsey Grammer which they are hoping to use the 10+90 model for. The 10+90 model is where Lionsgate sells the program to a cable station for a 10 episode test run and if it meets certain ratings thresholds, it is picked up for 90 more episodes. The model allows the show to get into profitable off network syndication quickly.
Managed brands is also a fast growing segment at Lions Gate. This product group, which consists of direct-to-DVD, acquired and licensed brands, third-party library product and specialty theatrical titles, was $92.9 million in the second quarter, a 79% increase from the prior year quarter driven by the independent hit Mud and the success of Duck Dynasty: Season 3, currently the biggest-selling TV show on DVD.
In fact, for the second quarter, non-theatrical revenues such as television and home entertainment were nearly half the $498 million in revenue for the quarter.
At current levels, Lions Gate trades at a market cap of $4 billion and PE of 20. For the fiscal 2013 year, the company has revenues of $2.7 billion ($1 billion thru first six months of fiscal 2014) and net income of $232 million. The company also has a 3 year guidance of $1 billion EBITDA, which they have reiterated they are on track for and would like to over perform as mentioned in the Q2 2014 Earnings Call. The company also has a $1.1 billion backlog that is "made up of a whole lot of movies and television shows not having anything to do with Hunger Games and certainly not Divergent" according to CEO Jon Felthmeimer during the conference call. Management is also looking at continuing to aggressively pay down debt and are even entertaining the idea of a buyback or dividend with excess cash on hand. The fiscal year will also be back-loaded with profitability like fiscal 2013 was according to management.
With such visibility into the future slate of movie/DVD cash cows of Catching Fire and Mockingjay 1 & 2, large backlog, management commitment to paying down debt and open to distributing excess cash to shareholders and a growing library of popular content it seems like a $4 billion valuation for the company leaves it significantly undervalued.
Lions Gate shares are a gift in the $20s. The company will continue to own the young adult market for the next few years with the Hunger Games trilogy wrapping up and hopefully continuing its dominance with the Divergent trilogy. As I stated above, they have plenty of other franchises and projects in the works that decrease dependence on The Hunger Games. The company's commitment to cleaning up its balance sheet and potentially adding a dividend or buyback with excess cash make it another reason this company is a very attractive long-term investment.
Additional disclosure: All investors are advised to conduct their own independent research into individual stocks before making a purchase decision.