Lions Gate Entertainment Q1 Loss Doesn't Hurt Long-Term Bullishness

| About: Lions Gate (LGF.A)
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Lions Gate Entertainment (LGF) shares continue to rise this week after reporting first- quarter earnings on Friday. Despite missing earnings and revenue targets, the company eased investors with Hunger Games profits still coming later in the year. With the final Twilight franchise set to hit theaters in November and a huge upcoming DVD release of "The Hunger Games," investors should be watching this stock.

In the first quarter, Lions Gate saw revenue of $471.8 million. This marked an 81% increase from the prior year, with strong results from several movies helping lead the way. The company reported a surprising net income loss in the quarter of $44.2 million. This represented negative earnings per share of $0.33. The loss was impacted by stock-based compensation and also Lions Gate's acquisition of Summit Entertainment. Marketing costs was one of the biggest costs during the quarter, as Lions Gate released five movies.

Lions Gate reassured investors during the call (transcript) that two-thirds of "The Hunger Games" profits lie ahead in the rest of the fiscal year. "The Hunger Games" is now the 12th-highest grossing movie of all time in the United States. Book sales of the "Hunger Games" series have doubled this year, passing the $50 million mark. "The Hunger Games" has been a huge success for Lions Gate and is only in the beginning stages. In fact, with the recent announcement of the "Hunger Games" book trilogy being turned into four movies, Lions Gate has a winner for the next three years.

The DVD release is coming soon for "The Hunger Games," and shaping up to be one of the biggest launches in Lions Gate's history. On August 18th, the hit blockbuster movie will come to retailers as customers line up for midnight releases across the country. Lions Gate has started to see strong demand from customers and also companies partnering with special promotions. Amazon (NASDAQ:AMZN) has signed a promotion with the "Hunger Games" movie and its Kindle Fire. Target (NYSE:TGT) is launching three unique pieces of memorabilia on its website around the time of the DVD release.

In 2012, Lions Gate is currently in fourth place among movie company's box office returns with a 12% market share. The company released five movies in the first quarter.

  • "Madea's Witness Protection": $64.5 million domestic
  • "Cabin in the Woods": $42.1 million domestic, $23.8 million foreign
  • "What to Expect When You're Expecting": $41.2 million domestic, $33.4 million foreign
  • "Safe": $17.1 million domestic, $18.1 million foreign
  • "Girl in Progress: $2.6 million domestic

Here are some highlights from the movie segment:

  • "Expendables 2" releases in theaters Friday August 17th
  • "Ender's Game" has completed principal photography, will be released in November 2013
  • Start production of "Red 2" next month, scheduled for a Summer 2013 release
  • Lions Gate UK on track to have a top five market share in the region with $100 million in box office this year

One announcement that I must have missed earlier is that "Catching Fire" and "Ender's Game" will both be released on IMAX screens next November. In fact with the two movie releases, Lions Gate will take over Imax screens for six weeks during the months of November and December.

Lions Gate's strength continues to be its movie business. Along with the movies that are released in theaters every year, the company has a catalog of over 13,000 movies in its library. The company's library of films continues to grow and provide financial stability. Lions Gate has a backlog of $992 million in its filmed entertainment segment. This includes licensing the films domestically and internationally.

In its televisions segment, Lions Gate now has 23 shows across 16 networks. Television continues to perform well and have its shows recognized with awards. Lions Gate now has 98 Emmy nominations, with 19 wins. Lions Gate also has 26 Golden Globe nominations with 6 wins. Here are some highlights of the company's current television segment:

  • "Mad Men" ratings up 15%% in season 5, all seasons have been licensed to Netflix (NASDAQ:NFLX), which has helped ratings the past several years
  • "Nurse Jackie" saw a fifth season ordered by Showtime. The show is also on the path to syndication
  • New television show "Next Caller," starring Dane Cook, is picked up by NBC
  • "Orange is the New Black," created by Jenji Kohan ("Weeds") is picked up by Netflix for 13 episodes
  • "Nashville" set to premiere on ABC October 10th
  • Creating a musical drama with Simon Fuller ("American Idol")
  • Adapting works from author Dennis Lehane ("Mystic River," "Gone Baby Gone")
  • New sitcom coming from George Lopez
  • "Family Trade," a reality show, picked up by Game Show Network

As far as profits from the company's television segment go, Lions Gate covered this during the conference call. "Weeds" will hit the second quarter, "Mad Men" will hit the third quarter and fourth quarter and "Anger Management" will hit both the third and fourth quarters as well.

One of Lions Gate's successful strategies in its television segment is its 10 +90 business model. The practice has been used to air 10 episodes of a new show and if it is successful, the show gets a 90 episode renewal. By having such a large renewal, Lions Gate can cut costs by shooting back to back seasons in a short period of time. The shows also don't have to worry about losing cast members to movies or demands over more money. This strategy has worked well with "House of Payne" (254 episodes), "Meet the Browns" (140 episodes), and "Are We There Yet?" (100 episodes). "Anger Management", the new show starring Charlie Sheen, is operating with a similar model. The company remains confident that FX will sign a 90-episode renewal.

Lions Gate continues to focus on controlling costs and paying down debt. The company paid down part of its debt associated with the acquisition of Summit Entertainment (My take on that acquisition can be found here) early. Over $200 million of the $500 loan associated with the acquisition has now been paid off in the last seven months. Lions Gate also redeemed $23.5 million in convertible notes.

I first wrote about "The Hunger Games" franchise and Lions Gate potential back in August of 2011. In that article, I had a conservative price target of $12 by the release of the second movie. Shares are up 90% since the time of that article. Since "The Hunger Games" was in theaters, shares are actually down 7%. This would tend to imply that the impact of "The Hunger Games" was baked into the share price over the last year. I firmly believe that investors are underestimating the profits Lions Gate will see in the rest of the fiscal year from the box office and DVD results of Hunger Games. I also think Lions Gate is a long-term pick on "The Hunger Games" franchise and other key titles.

Several upcoming catalysts could send shares higher in the short and long term including:

  • DVD release of "The Hunger Games" (August 18th)
  • Release of "Breaking Dawn: Part II" (November)
  • Second-quarter earnings finally seeing big profits from "The Hunger Games"
  • Release of both "Catching Fire" and "Ender's Game" in the same quarter, and both on IMAX screens (November/December 2013)

Disclosure: I am long LGF, IMAX.