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Executive summary:

  • LGF continues to show impressive international box office revenue.
  • The company was the fifth highest grossing studio in 2013.
  • Television syndication and new shoes offers huge upside and diversification.
  • Several new film franchises will power the company after "The Hunger Games" franchise is over.

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Last week, movie company Lions Gate Entertainment (NYSE:LGF) reported record quarterly revenue. The positive earnings sent shares up, but they still sit shy of all-time records. With a huge movie backlog, upcoming franchises and a growing television slate, shares of Lions Gate continue to be undervalued. With a look at the company's earnings call, several noticeable growth opportunities can be seen.

Catching Fire

Lions Gate had an impressive show at the box office in 2013. The studio ranked fifth of all movie studios with domestic box office of $1.07 billion, good for a 9.8% share. This ranked Lions Gate ahead of 20th Century Fox and Paramount. Lions Gate also ranked fifth in 2012, but had a higher percentage share with 11.4%.

The biggest driver of the 2013 box office for Lions Gate was "Catching Fire," the sequel to "The Hunger Games." The movie based on a bestselling book trilogy grossed $421.8 million in North America and $438.9 million in international markets. The movie currently ranks twelfth for domestic box office revenue and 35th overall in total box office revenue worldwide. The success of the movie powered the third quarter, but the good news for investors is there is still more revenue to be recognized for Lions Gate.

When asked during the earnings call what percent of "Catching Fire" revenue was represented in the December quarter, Lions Gate responded with, "We have approximately 2/3 of the contribution from "Catching Fire" still to go." That's a pretty big deal for investors after the earnings beat in the quarter. For a movie that did over $850 million, two thirds would represent more than $575 million in unrecorded revenue. Just as "Catching Fire" was a focal point of the third quarter, it should also help Lions Gate turn in solid earnings in the fourth quarter and first quarter.

Divergent

In March, Lions Gate will release "Divergent," a movie based on another successful young adult book series. I have offered my take on "Divergent" in past articles, but I truly believe this series will do well. My guess would be a $220 million domestic box office take and a $450 million overall. I think this is my conservative estimate and I hope the first movie does well.

The book series has seen 13 million copies of "Divergent" sold and the movie trailer has over 7.5 million views. Despite the first movie not hitting the big screen until March, Lions Gate said in the recent earnings call that it was gearing up to officially green light the sequel "Insurgent."

Future Franchises

Looking past "Mockingjay" and "Divergent," there is plenty of future franchises for Lions Gate, which will power the company. Here is a look at some of the upcoming movies from Lions Gate:

· "Draft Day": April 2014, NFL themed movie that was promoted during Super Bowl

· "The Expendables 3": August 2014, added several new characters in franchise that will carry on for some time.

· "Now You See Me Sequel": Original movie made over $350 million

· "Gods of Egypt": February 2016, risk has been mitigated with subsidies and partner financing

· "Motdecai": Starring Johnny Depp in a Pink Panther style role

· "The Shack": Ready to announce a filmmaker, movie based on bestselling book with over 10 million copies sold, Easter 2015 release

· "The Glass Castle": Based on bestseller (on list for 261 weeks) starring Jennifer Lawrence

· "Chaos Walking" - three book series, Lions Gate has won adaptation rights

· "Saw" - Possible reboot or spin-off

· "Last Witch Hunter" - Starring Vin Diesel

Of the future movies, Lions Gate is most thrilled with "Gods of Egypt," "Mortdecai," "Chaos Walking" and "Gods of Egypt." All of these upcoming films have been deemed as future franchises.

Television

In 2014, Lions Gate will see one of its most successful television shows start its final season in "Mad Men." Among the highlights for Lions Gate in its television segment were "Nashville" and "Orange is the New Black." "Orange is the New Black" is the most watched show on Netflix (NASDAQ:NFLX). "Nashville" ranks as the number one show in its time slot for the key advertising demographic women aged 18-34.

Syndication remains a huge growth driver for Lions Gate's television segment. The company owns the syndication to "Family Feud" and "The Wendy Williams Show," which both have seen strong sales to television channels. An announcement on the syndication of "Nashville" is expected soon and that could be a huge revenue boost for the syndication segment. Along with "Family Feud," Lions Gate could also see game show success with the upcoming "Celebrity Name Game," which has already been sold to 90% of the country.

Among the upcoming television shows from Lions Gate are:

· "Houdini" min-series on History Channel

· "Rosemary's Baby" on NBC

· "Manhattan" on WGN, said to be in the vein of "The Right Stuff"

· "Chasing Life" on ABC Family

· "Deadbeat" on Hulu

· "Saint George" starring George Lopez on FX

· "Braddock & Jackson" starring Kelsey Grammer and Martin Lawrence on FX

Both "Saint George" and "Braddock & Jackson" are expected to operate in the 10/90 model that was made famous for Lions Gate by Tyler Perry. The concept centers around a show producing 10 episodes and if well received, the show could generate a guaranteed 90 additional episodes. This sets up well for syndication down the road with a base of at least 100 episodes available. Lions Gate also has a partnership with actor Kevin James that will likely see this same 10/90 model. Heard during the earnings call, "So we do expect this (Kevin James project) has great potential to work in broadcast in the 10-90 model."

The television segment of Lions Gate is now expected to turn in $475 million in revenue. For a company expected to post annual revenue of $2.77 billion, that would represent 17%. Television could be the key to growth for Lions Gate and diversification away from young adult movies.

Financial Health

Some investors question whether the growth from movies can continue for Lions Gate down the road. After all, the "Twilight" franchise is complete and by 2015, "The Hunger Games" will be played out in theaters. Whether or not Lions Gate will have more blockbuster franchises is up for debate, but the financial strength of the company remains pretty solid. Over one year ago, Lions Gate had an average interest rate of 10.25% on its debt. The company is now paying an average of 5.13% on its debt. The level of debt has shrunk drastically from $446 million a year ago to $70 million, reported during the recent earnings call. Over the last 13 months, Lions Gate has retired over $370 million worth of debt, leaving the company in strong financial health. Interest expenses in the third quarter were $11.5 million, down from the prior year's $18.2 million. By paying off all of its debt, Lions Gate continues to free up this cash it can use toward dividends, share buybacks and acquisitions.

With financial health came the ability to pay quarterly dividends. I believe this was one of the key pieces for future investors in Lions Gate. While the days of shares doubling or tripling in a couple years are likely over, growth and strong dividends could propel investors into the media play. In the third quarter, Lions Gate paid its first quarterly dividend of $0.05. Lions Gate is also hoping for its dividend "to grow with the continued success of the business." While shares yield less than 1%, I expect the dividend to continue to increase, especially once all of the debt is retired.

Investors should be excited by this quote from the earnings call, "We'll continue to use our free cash flow to drive our equity returns, and we'll continue to find ways to return value to our shareholders."

Conclusion

It should come as no surprise to readers of mine that I like Lions Gate going forward. I was an early bull of the company back in August of 2011 before "The Hunger Games" franchise hit the big screen. Since that first article, shares of Lions Gate are up 369%. Since my last recommendation, shares of Lions Gate are up only 3%. You can view my entire set of work on Lions Gate shares here and see different reasons for my bullishness. Lions Gate shares continue to be a key piece to my personal portfolio.

Disclosure: I am long LGF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Lions Gate Entertainment Third Quarter Earnings: 5 Key Takeaways