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More franchise revenue = more upside for LGF stock
“The Hunger Games: Mockingjay, Part 1” opened this past weekend to strong box office, earning $121.9 million domestically. Despite the boffo number, it was still 23% below last year’s entry, “Catching Fire”. What does this mean for holders of Lionsgate Entertainment (NYSE: LGF)?
The notion of splitting the final book of the series into two films is one that I personally think is driven by the not-entirely-bad-idea of maximizing revenue for a given franchise. The problem is that this has now been done with “Harry Potter” and “The Hobbit”, and the results have been mediocre from a content perspective. “Harry Potter and The Deathly Hallows” managed to create two good films, though the second was better. Still, it was unnecessary from a storytelling perspective.
“The Hobbit” was a disaster in that regards, with the second film being vastly better than the first, which was a lumbering bore. Reviews of “Mockingjay” is that it acts as a boring placeholder, which explains the weaker box office.
All of that said, if you are an investor, you don’t care. The film will turn a tidy profit, after all markets have been duly exploited. The backlash against a weak film for some franchises will always be minimal, because die-hard fans will pay no matter what. Just look at “Skyfall”, a weak entry in the James Bond franchise, which did fabulous numbers.
Yet Lionsgate’s fate does not rest on “The Hunger Games” franchise. The company has expanded into several lines of entertainment to diversify its risk. It has managed to get the rights to the “Divergent” series, as well as create its own with “The Expendables”, “Step Up”, “Red”, and Tyler Perry’s seemingly-bottomless pit of movies.
Lionsgate is successful not because it is in the film production business, which is exteremly risky, but because it is in the distribution business. That’s where the money always is.
It distributes first run theatrical films, television series, its own movie catalog, and third party product via retail partners including all the major cable and satellite providers, and via digital platforms such as Apple (NASDAQ:AAPL) iTunes, Amazon (NASDAQ:AMZN), Wal-Mart’s (NYSE:WMT) Vudu, Microsoft’s (NASDAQ:MSFT) Xbox, Google (NASDAQ:GOOG) Play, Netflix (NASDAQ:NFLX), Hulu, and others.
LGF is able to acquire a lot of films that it doesn’t produce, gets them for the right price, distributes them theatrically and on DVD/streaming. The company picks up about 50 films per year, and also gets the rights to TV series that it distributes – even older, popular TV series like Will and Grace and Little House on The Prairie.
It has a massive distribution network for tons of children’s programming, including Saban Entertainment’s Power Rangers , LeapFrog Entertainment’s LeapFrog , MGA Entertainment’s LalaLoopsy and Bratz, American Greetings’ Care Bears, Scholastic’s Clifford the Big Red Dog , HIT Entertainment’s Thomas & Friends , Barney , Bob The Builder , Angelina Ballerina and Fireman Sam , as well as our catalog of Teenage Mutant Ninja Turtles , Marvel Animated Features, and Speed Racer: The Next Generation.
I mentioned LGF’s own library, which consists of over 15,000 titles. That’s the value of a library and why studios purchase libraries of other companies and like to form their own. That library can be exploited indefinitely. Titles that may seem ridiculous to own one day will become valuable on another.
LGF stock is at $33.10, a bit off its 52-week high. Amazingly, the company has no debt. Everything is financed via cash flow. While “Mockingjay” may have not hit a home run, I have no worries about the company itself.
As for the stock, it is expensive when compared to other operations. AMC Networks (NYSE:AMCX), Walt Disney (NYSE:DIS), AMC Entertainment (NYSE:AMC) all trade around 11x EV-to-EBITDA, a metric I prefer to use with entertainment companies because revenue can jump around from year to year. LGF stock trades at 21x.
I’d suggest you wait before buying in, to see if you can get in cheaper.
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