Shareholders of Lions Gate Entertainment (LGF) received a nice surprise as their stock was up big in after-hours trading. Shares were up almost 9% after the company reported second quarter earnings. The company beat consensus revenue and earnings per share numbers, thanks to the success of "The Hunger Games" on DVD and Blu-Ray over the course of the quarter. With the popular book franchise set to have three more movies to its credit, new investors should consider whether now is the time to get into the entertainment stock.
In the second quarter, Lions Gate reported revenue of $707.0 million, an increase of 97% from the prior year. Net income was reported as $75.5 million, representing earnings per share of $0.56. Analysts on Yahoo Finance had been expecting revenue of $623.32 million, and earnings per share of $0.12. Let that sink in for a minute, analysts expected $0.12, and the company reported $0.56. In fact, analysts were only projecting the company to earn $0.57 in earnings per share for the entire fiscal year. It seems those estimates will be raised soon. The earnings beat was also a surprise after the company reported a loss in the first quarter.
Revenue was led by "The Hunger Games" DVD and Blu-Ray release, which saw 3.8 million copies sold in North America in the first weekend of release. Motion picture revenue as a whole increased 178% to $608.0 million. Along with DVD sales, theatrical revenue was an impressive $116.2 million from new releases "The Possession", "The Expendables 2", "Step Up Revolution", and "Madea's Witness Protection". Television revenue represented $35.5 million in the quarter, an increase of 26%. International motion picture revenue was a strong $108.0 million. Lionsgate UK represented $48.4 million in revenue. The one negative segment was TV Production revenue, which decreased 29% to $99.0 million. The losses were due to a comparison to last year, which saw four seasons of "Mad Men" licensed to Netflix (NFLX).
"The Hunger Games" has made a total of $686.5 million in theaters. An amazing $408 million of that was from North America. While that number is a large amount and high domestic percent of 59%, it also points out the opportunity going forward. The first "Twilight" movie had 49% of its box office domestic. The following "Eclipse" sequel increased the foreign contribution to 58%. I see a pattern similar to this happening as Lions Gate uses its international distributors and more companies sign on to get this huge blockbuster franchise. The first movie in "The Hunger Games" franchise is already where Twilight was with its second movie. The box office expectations for the sequels will be huge, as will the licensing possibilities now with an even bigger fan base.
The three additional movies have the following release dates:
· Catching Fire: November 22, 2013
· Mockingjay: Part 1: November 21, 2014
· Mockingjay: Part 2: November 20, 2015
As you can see, Lions Gate is setting itself up to have a blockbuster in November of the next three years. The company loses the Twilight franchise after this November, and has positioned itself well to move forward. I believe investors are still underestimating what this franchise is capable of. Shares saw a huge run-up around the time of the first movie's release. If you do not want to be left on the sidelines, the time to buy shares may be now.
Lions Gate has its next blockbuster movie "The Twilight Saga: Breaking Dawn-Part 2" releasing on November 16th. The movie is the final of four movies based on the trilogy of best selling books. The movie will be a huge hit and will bring in a large amount of licensing and box office revenue for the company.
Going into earnings, shares had already lost over 12% in the last five days. The earnings beat sent shares higher, but they still remain lower than year highs seen less than a week ago. Shares should be up Friday as investors process the large earnings per share beat and analysts recommend buying the stock. I strongly recommend buying on any dips and think the stock is still a buy around $16. Lions Gate remains my largest position in my personal portfolio.