buying opportunity in lions gate entertainment?
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Post on 11-Aug-2014
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DESCRIPTIONWhy short term weakness in Lions Gate Entertainment may create a buying opportunity for long term investors.
- Is There a Buying Opportunity in Lions Gate?
- A lackluster year for Lions Gate (NYSE: LGF)
- Buying opportunity? Lions Gate delivered disappointing sales figures for the first quarter in 2014. However, its main launch, Divergent, was released only 10 days before the end of the quarter. This means the period included most of the expenses, but only a small fraction of revenues, related to Divergent. On a forward-looking basis, the companys smart business model and healthy growth prospects look quite encouraging. Is short-term weakness in Lions Gate creating a buying opportunity for investors?
- A smart business model Business Strategy: We continue to grow and diversify our portfolio of film, television and digital content to capitalize on demand from emerging and traditional platforms throughout the world marketplace. We maintain a disciplined approach to acquisition, production and distribution of film and television product, by balancing our financial risks against the probability of commercial success for each project. We pursue the same disciplined approach to investments in, and acquisition of, libraries and other assets complementary to our business. We believe that our strategic focus on content and creation of innovative content distribution strategies will enhance our competitive position in the industry, ensure optimal use of our capital, build a diversified foundation for future growth and generate significant long-term value for our shareholders. Source: Lions Gate 10-K
- Capital allocation discipline Unlike many competitors, Lions Gate is focused on keeping its production costs under control and carefully examining the economic viability of new projects. The company relies on franchises as a strategy to generate more reliable and predictable revenues. This smart business model means that Lions Gate does not need every new movie to be a big hit for it to be financially successful. Still, blockbusters such as The Hunger Games can be enormously profitable for the company and its shareholders.
- Risk management Lions Gate usually films in locations offering tax subsidies, low-interest-rate loans, and cash rebates, among other economic incentives. Lions Gate implements co-production agreements with other production companies and it pre-sells international distribution rights to reduce financial risk. The company often signs agreements with actors that offer them participation in a movie's financial success in exchange for reducing up-front payments.
- Betting on franchises The Hunger Games is a major success that should continue generating big results for Lions Gate over years to come. The company will be launching a new Hunger Games movie in November, and it's also working on a Hunger Games video game as well as exploring the possibility of a theme park attraction. Divergent is off to a strong start, with nearly $275 million in global box office receipts as of May 30 and promising possibilities in the years ahead. Lions Gate has recently signed an agreement to produce a new film based on the globally popular Power Rangers franchise, opening a new door to exciting growth opportunities.
- A promising pipeline
- Growth opportunities in television Highly successful television series such as Mad Men, Orange Is the New Black, and Nashville have positioned Lions Gate as a leading player in that segment. Revenues in the television segment increased by a big 18% to a record $447.4 million during fiscal 2014. Management believes revenues in the television division could increase 50% by 2017, while profit margins in that segment could double, from 7% to 14%, over that time period.
- Optimistic guidance The trajectory of our business, the depth of our content pipelines and the ongoing generation of predictable income from our film franchises, television properties and filmed entertainment library continue to give us excellent long-term visibility. --CEO Jon Feltheimer
- Foolish takeaway Lions Gate delivered disappointing financial performance for the first quarter. But that was mostly because of the timing of the Divergent launch. The company has a smart and financially efficient business model. Lions Gate offers a promising pipeline of new launches and exciting growth opportunities in the years ahead. Short-term weakness in Lions Gate looks like a buying opportunity for long-term investors.
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