Lions Gate (NYSE:LGF) reported its fourth-quarter results last week in a report which did not please investors of the maker of the popular Hunger Games movies.
The company has shown rapid growth in recent years, yet investors wonder what will drive future earnings at this point in time. Combined with a rather high valuation and quite a bit of leverage employed, I continue to shun the shares, despite a recent sell-off.
Lions Gate reported fourth-quarter revenues of $721.9 million, down 8.1% compared to the year before. Note that comparisons were difficult, with revenues increasing some 70% for the full year compared to the previous year.
The company posted net earnings of $49.2 million, down from $163.0 million reported the year before, when a $86.7 million tax benefit aided the bottom line last year. Excluding this tax impact, earnings were still down significantly from the year before.
GAAP earnings on a diluted basis came in at $0.33 per share.
Looking Into The Results
Lions Gate's strong performance over the past two years have been driven by the performance of The Hunger Games: Catching Fire and Now You See Me.
Equity investment contributions from EPIX, the partnership with Viacom (NASDAQ:VIAB) and MGM as well as TVGN, and the partnership with CBS Corp. (NYSE:CBS) boosted results. Results for the past year have been slightly lower, as the company released 13 movies domestically, down from 19 a year earlier. This was partially offset by growth in television production and foreign activities.
The Hunger Games: Catching Fire is on track to become the 10th-highest grossing domestic movie, with $865 million in gross revenues. Now You See Me grossed more than $350 million globally, while Divergent is off to a strong start as well after receiving mixed reviews.
Growth is resulting in better diversification of the revenue streams. Television production generated revenues of $447.4 million, while international operations grossed $397.1 million in sales. The filmed entertainment library resulted in $497 million in revenues, being a true and predictable cash cow for the firm.
Full-year GAAP earnings came in at $152 million for the past year, but were severely impacted by $39.6 million in early extinguishment debt costs. Note that earnings in the year before have been aided by large tax benefits.
A promising sign in the report, the backlog of contracted but not yet recorded revenues, rose to $1.2 billion at the end of the year. This was up a hundred million compared to the year before.
Valuing Lions Gate
The company ended the quarter with $25.7 million in cash and equivalents. The company has many and various outstanding liabilities. For starters, there is a combined $676 million in outstanding credit facilities, notes, term loans and convertible notes. On top of this comes another $500 million in film obligations and production loans, adding to the leverage of the firm.
For the full year, Lions Gate reported revenues of $2.63 billion, on which it reported net earnings of $152 million.
At $26 per share, equity in the firm is valued at $3.7 billion, which is equivalent to 1.4 times annual revenues and 24-25 times annual earnings.
Lions Gate pays a quarterly dividend of $0.05 per share for an annual dividend yield of 0.8%.
History Of Rapid Growth
Historically, Lions Gate managed to steadily grow its revenues from $843 million in 2005 to $1.5-$1.6 billion for the years of 2009 to 2012. Then sales saw another big boost, as they jumped by more than 70% in 2013 to $2.7 billion on the back of the success of the company's blockbuster titles.
Years of losses in the previous years resulted in tax credits, which, combined with operating leverage, resulted in very steep profits of $232 million in 2013. This was only to see earnings fall this year on the back of higher taxes and pressure on sales.
Unfortunately, shareholders have seen about 50% dilution over the past decade. Shares largely traded in a $5-$10 range between 2004 and 2011, to break out to highs of $38 late in 2013. Ever since, shares have given up a third of their market value.
To offset some of the dilution, the company has retired 3.43 million shares at a cost of $90.5 million since the last week of 2013. This reduced the outstanding share count by roughly 2.5% in recent months.
Implications For Investors
Shares of Lions Gate have given up a third of their value, as investors continue to value the company on the Hunger Games and Divergent franchise, which has received mixed reviews of late.
Important to know is that the company is planning to revive the Power Rangers as a franchise, while it traditionally has been very strong in documentaries, other television programming and home entertainment, creating diversification for investors and the company at large.
Some of the television business's best-known shows include Mad Men, Anger Management and Orange is the New Black. Perhaps most interesting for the company's cash flows is the home entertainment business, with a library of 15,000 titles of both movies and television shows.
I remain in doubt about the company. Lions Gate is quite leveraged, yet stable cash flows should allow for debt reduction, thereby allowing the company to save on still high effective interest rates. That leaves the question about the current equity valuation of $3.7 billion, which is challenging based on today's results at 25 times earnings, while topline revenues are under pressure, to say the least.
For that reason, I continue to shun the shares at the moment. I would like to see a bit more clarity and stability for the short-to-medium term revenues of the franchise before picking up shares on this dip.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.