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Summary

  • Lions Gate reports earnings on Thursday 7 August 2014.
  • The company is developing new revenue streams that show promise while carefully nurturing its massive franchises.
  • Lions Gate stock looks attractive after beginning to recover from a 50% retrace of its epic run higher.

Lions Gate: Catch It Before the Hype

Lions Gate Entertainment Corp. (NYSE:LGF) releases its earnings after the close on August 7, 2014, with a conference call scheduled for August 8th. Analysts are expecting the company to earn $0.16 per share on $507.13 million in revenue. This is a good time to review where the company stands. It may be a good buy before earnings for the adventurous, or after earnings for those with more of a wait-and-see posture.

Let's briefly to go through the history of the company as part of any decision to invest in it.

Lions Gate History

Lions Gate was founded in 1997 by Frank Giustra and Avi Federgreen, both Canadian investment bankers. The two, with no visible experience in the film industry, quickly started acquiring film-related properties (their work as bankers may have related to the film industry, but that is unclear). After listing on the Toronto Stock Exchange, they moved to the American Stock Exchange, and then ultimately to the New York Stock Exchange.

The company grew quickly by making acquisitions. The list of corporate moves is dizzying to read. The company's film studio acquisitions then released a long line of films, which were mostly limited releases and horror films. "Monster's Ball" in 2001, starring Halle Berry and Billy Bob Thornton, was a huge success, earning $45 million on a $4 million budget and earning Berry an Academy Award, but that was an exception to the rule.

After another long string of mostly "small" films, the company acquired Summit Entertainment on January 13, 2012. Summit was responsible for the successful "Twilight Saga" films. Lions Gate also acquired the rights to "The Hunger Games," a popular science fiction trilogy of novels. The year 2012 turned into a bonanza year for Lions Gate, as the final "Twilight" film did well, as did the first "The Hunger Games" film.

"The Hunger Games: Catching Fire" was released in November 2013 and earned $865 million worldwide. It earned more money for the studio than the original film. The company also released several other films in 2013 and 2014, such as the much-hyped "Divergent," but none was in the same financial ballpark as the "Hunger Games" franchise.

Upcoming Releases

Lions Gate has "The Expendables 3" set for release on August 15, 2014 and "The Hunger Games: Mockingjay - Part 1" due for release on November 21, 2014. As those are franchise films with devoted audiences and most likely tie-in deals in place, so those dates are unlikely to be changed once announced. The follow-up to the Hunger Games sequel, "The Hunger Games: Mockingjay - Part 2," is scheduled for release on November 20, 2015.

With these films, Lions Gate is following the well-worn path of Summit's handling of the "Twiight" franchise, meting out one film per year spaced exactly one year apart and positioned for maximum impact from the same audiences that enjoyed the predecessor.

There are no other major releases on the schedule aside from the first "Divergent" sequel scheduled for March 20, 2015.

Company Prospects

The earnings announcement on 7 August 2014 will be whatever it will be; trying to guess earnings in advance - and, more importantly, the market's reaction to them - is pointless unless you're a gambler. The company has had solid performance over the past few years, and there is no reason to expect that to stop now.

"The Expendables 3" led by Sylvester Stallone is a wheezing franchise that has a devoted core audience and limited upside potential. However, expectations for it are low and it was made for the international market, as was "The Expendables 2," which made more worldwide than the first "Expendables." While the "Expendables" stars may be considered yesterday's news in the States, overseas they (evidently) retain their star power. The way Hollywood studios sell the rights off in advance for a film like "The Expendables 3," there is probably limited downside and upside for the company in any event.

"The Hunger Games: Mockingjay - Part 1" also is part of a franchise that may start showing its age. However, that hasn't happened yet. Lions Gate is handling this franchise precisely the way that it and Summit handled "The Twilight Saga: Breaking Dawn - Part 1" in 2011, which was in the same stage of the sequel cycle. That film earned $712 million compared to its predecessor's $698 million ("The Twilight Saga: Eclipse" in 2010). Just like with the Twilight Saga films, there is every likelihood that the "Hunger Games" films will exceed each predecessor in total box office, especially considering that they are aimed at the same target audiences that are trained by now after all these years of similar releases to hit the local Cineplex right around Thanksgiving for the latest Summit/Lions Gate teen girl fantasy. Expect more announcements to gin up anticipation for this major release, such as the recent one that Lorde will work on the soundtrack.

"Divergent" was a modest success for the studio after its release on 18 March 2014, and two sequels are on the schedule for release on 20 March 2015 and in 2017 (no doubt somewhere in the vicinity of March 18). "Divergent" aims squarely at the same devoted "Twilight/Hunger Games" female audience, and Lions Gate is fanatical about releasing its sequels at precisely the same time of year so they again catch their audience on break from school or whatever else made them available and willing to see the first film.

As DreamWorks Animation CEO Jeffrey Katzenberg noted during his recent earnings conference call, the film industry is in a cyclical downturn this summer, which it should break out of at some point over the next year or so. That is probably in part due to the overall slate of weak film offerings since last year's massive Disney hit "Frozen." There is a lot of pent-up demand for attention-grabbing, tent-pole films, and the next Hunger Games film could be the one to start shaking the industry out of its torpor.

Also of interest for potential upside is what the company is doing aside from its flagship film franchises. Lions Gate is partnering with Alibaba (which is one of the most anticipated upcoming IPOs of the year and will trade on the NYSE under symbol BABA) to launch a new subscription-based streaming service in China. This service will include access to Lions Gate's library of more than 13,000 films.

The China market has become like the pot of gold at the end of the rainbow for film studios: "Transformers: Age of Extinction" earned more in its first five days of release in China than it did in the United States, and it became the top-grossing film of all time in China. The Chinese market is waking up, and Lions Gate is alongside Disney and DreamWorks Animation (both building theme parks in Shanghai) in getting its foot in the door.

Lionsgate Television is doing well, with over 30 television shows on over 20 different networks. Lions Gate has shown a sure hand in that field, steadily rolling out hits such as "Mad Men" and "Orange is the New Black." This shows that Lions Gate understands its audience. The company also is about to revive the popular "Power Rangers" television franchise on the big screen.

With Disney and DreamWorks Animation aggressively pursuing theme parks in China and elsewhere, Lions Gate also may have some firm news on that score in coming months. Already, Lions Gate is planning on sending "Hunger Games" exhibits around the country to museums and schools, so obviously it is thinking about developing its brand. If the theme-park news were out already (if in fact there is any), it would be priced into the stock - but there has been nothing specific yet. Video games are another potential source of revenue that Lions Gate apparently is going to develop.

Risks

The main risks (beyond the stock price going down for any reason or none at all, including an overall market meltdown) are clear. The upcoming franchise films could underperform at the box office, and other revenues (DVD revenue etc.) also may come in weak. The film business might not snap back from its current cyclical downturn. Investors may focus on negative details such as the compensation of top executives at the company, which has been in the news recently, or class action suits and the like. The Alibaba connection may not spark as much interest for Lions Gate product in China as expected. Lions Gate may simply be a one-trick pony that has nothing in the pipeline beyond "The Hunger Games" films.

Lions Gate is a small, less-diversified, more leveraged studio than the giants like 20th Century Fox, Warner Bros. and Sony-Columbia. Also, the largely female audience that Lions Gate's films cater to may tire at some point of being fed the same slick repackaged product over and over - but that hasn't happened yet. Tastes shift in the film business all the time.

Timing

Timing is everything in investing, as it is in life. Whether or not you want to grab a position in Lions Gate before the earnings call on August 7 is up to your own preferences for playing earnings. There isn't any reason to think that Lions Gate will seriously disappoint this quarter. If you are "on the fence," wait until after earnings, playing earnings is for aggressive investors.

However, one way or another, if the company and its steady stream of hits intrigue you, you may wish to consider picking up some LGF well before the hype begins during the run-up into this year's "Hunger Games" release. Last year, the stock peaked in September, then declined through the 2013 "Hunger Games" sequel during the holidays and, overall, for six months. If you are interested in Lions Gate, waiting to buy until close to the release of "The Hunger Games: Mockingjay - Part 1" in November is taking an extra risk, because that may be when the early birds decide to sell the news.

Looking at the long-term chart, LGF went on an epic run from around 11 in April 2012 to a peak of 37.81 in mid-September 2013. Then, the stock pulled back almost exactly to the 50% Fibonacci Line around $24.50. On a technical basis, the stock has had its rest after the big run higher and now has turned around to the upside again - but chart work is no guarantee of anything.

The stock also recently pierced the 200-day moving average back to the upside and is currently re-testing that key average, providing a buying opportunity and easy stop-out point. For a short-term play, entry under $31 could be accompanied with a stop just below the 200-day moving average currently sitting at $29.94, giving minimal risk for maximum possible reward. For a swing, giving the stock price a little more leeway down to supportive congestion in the $28.30 area could pay off over the longer term.

Conclusion

The film business is full of risks, but Lions Gate looks like a good risk to the long side.

Source: Lions Gate Looks Attractive