* All data are as of the close of Monday, December 15, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
The overall industry we are dealing with here is the Movie Production and Theaters industry, which is a mix of movie and television programming production companies, movie theater chains, and movie filming/projection technology companies such as 3-D equipment makers.
Hence, for fairer company comparisons, I'll be sorting the industry into various blocks of more closely related companies. Having already run a comparison on movie theater chains, this comparison will be devoted to movie production companies, the largest two of which are both U.S.-based.
- Lions Gate Entertainment Corp. (NYSE: LGF), headquartered in Santa Monica, California, develops, produces and distributes feature films, as well as television programming including television series, television movies, mini-series, and non-fiction programs. The company distributes a library of approximately 15,000 motion picture titles, television episodes, and programs, in addition to producing, syndicating and distributing 30 television shows on 20 networks. As an interesting side-note, the company was founded in Vancouver, Canada, in 1997, and was named after the famous Vancouver landmark Lions Gate Bridge, a suspension bridge which is something of a smaller brother to San Francisco's Golden Gate Bridge.
- DreamWorks Animation SKG Inc. (NASDAQ: DWA), headquartered in Glendale, California, develops, produces and distributes animated films, in addition to toy figures based on its characters. It also produces television series and live entertainment shows, licenses rights to portray it characters to theme parks, cruise ships, hotels and other entertainment venues, and holds marketing contracts with McDonald's (NYSE:MCD), Hewlett-Packard (NYSE:HPQ) and Intel (NASDAQ:INTC).
To individual investors, the movie production industry can be something of a two-edged sword that can help you one way but slice you the other way if you're not careful. Though it is classified as a Consumer Discretionary industry which typically suffers during hard economic times, movie production companies that have a large enough library of popular films and television programs can ride out the storms rather nicely. When consumers are strapped for cash, they will cut the more expensive forms of entertainment like vacations, but will seldom sacrifice movie and TV entertainment whether at home or in a theater.
This was clearly evident during the last major economic downturn from mid 2007 until the market hit bottom in early 2009, as graphed below. Where the broader market S&P 500 index [black] fell 56% and the SPDR Consumer Discretionary Sector ETF (NYSE: XLY) [blue] fell 60%, both Lions Gate [beige] and DreamWorks [purple] managed to remain above the two benchmarks for most of the span, ending up with losses of just 51% and 42% respectively.
Yet during a bull market, that sword is not necessarily going to cut in your favor for all companies in the space. Much depends on the movie company's library of past projects as well as new projects in the pipeline.
Since the success of new releases can never be accurately anticipated, with films often taking the market by surprise by either smashing box office records or flopping miserably, the success of a production company's stock can be as much of an unpredictable surprise as their movie releases.
As a case in point, during the economic recovery since early 2009 as graphed below, where the S&P has risen 195% and the XLY has risen 335%, DreamWorks has risen only 18% where Lions Gate has roared 460%.
Yet the picture making business is just as unpredictable as the consumer electronics business, as companies are repeatedly forced to make lightening strike again and again and again, something which is very difficult to achieve over the longer term. This is an industry where companies cannot rest on their laurels, but must repeatedly captivate consumers with new blockbusters in order to survive, and investors need to realize how much of a gamble that is.
For the time being, however, the future looks picture perfect for the Movie Production industry as a whole, as tabled below where green indicates outperformance while yellow denotes underperformance.
Over the current and next quarters, the industry's earnings are expected to outgrow the broader market's average earnings growth at some 7.98 to 19.33 times its rate, before slowing to a more sustainable but still robust 2.55 to 2.23 times in 2015 and beyond.
Zooming-in a little closer, however, the two largest Movie Production companies are expected to continue their customary split performance, as tabled below.
While Lions Gate is expected to outgrow the broader market impressively clear across the calendar, reaching growth rates of 1.53 times next quarter, 1.40 times in 2015, and 2.70 times annually over the next five years, DreamWorks is seen suffering from bipolar disorder where its earnings growth is concerned, shrinking in the current quarter, outperforming sensationally next quarter and in 2015 at some 7.05 to 37.13 times the S&P's growth rate, only to flop miserably beyond.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the two compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, DreamWorks generated the greater revenue growth year-over-year, while Lions Gate enjoyed the greater earnings growth with a tremendous showing.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our two contestants, Lions Gate operated with the wider profit and operating margins, while DreamWorks contended with the narrower, even negative profit margins denoting loss.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Lions Gate's management team produced the greater returns on assets and equity, while DreamWork's team produced the least, even losing some equity.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the two companies here compared, Lions Gate distributed the greater diluted earnings per share gain as a percentage of its current share price, while DreamWorks' DEPS over current stock price is lower and negative, denoting loss.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our two combatants, Lions Gate's stock is cheaper relative to forward earnings while DreamWorks' is better valued relative to company book and 5-year PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our two specimens, Lions Gate offers the higher percentages of earnings over current stock price for all time periods, where DreamWorks offers the lower percentages.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Lions Gate offers the greater growth in the current quarter and over the next five years, while DreamWorks offers it in spades next quarter and in 2015, but only after some shrinkage in the current quarter.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Lions Gate's stock offers the greater upside potential and lesser downside risk, while DreamWorks' stock offers the lesser upside and greater downside.
It must be noted, however, that Lions Gate's stock is already trading below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our two contenders, Lions Gate is best recommended with 4 strong buy and 8 buy ratings representing 85.71% of its 14 analysts, with DreamWorks garnering 0 strong buy and 0 buy ratings representing 0% of its 12 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Lions Gate by bridging a gaping divide, outperforming in 24 metrics and underperforming in 7 for a net score of +17, with DreamWorks living a nightmare, outperforming in 7 metrics and underperforming in 24 for a net score of -17.
Where the Movie Production industry is expected to outperform the S&P broader market astronomically this and next quarters, and significantly in 2015 and beyond, the two largest companies in the space are expected to perform much as they have until now, with Lions Gate steadily outgrowing the broader market in earnings while DreamWorks shrinks, spurts and then slumps again.
After taking all company fundamentals into account, Lions Gate Entertainment puts on the more entertaining financial showing, given its lower stock price to forward earnings, higher current ratio, higher revenue over market cap, wider profit and operating margins, higher returns on assets and equity, higher EBITDA over market cap and revenue, higher diluted earnings over current stock price, higher trailing earnings growth, higher future earnings over current stock price in all periods, higher future earnings growth overall, higher dividend, better price targets, and more strong buy and buy analyst recommendations - decisively winning the Movie Production industry competition with a blockbuster showing.