A Well-Diversified Film Studio Set to Grow

A Well-Diversified Film Studio Set to Grow

Lions Gate Entertainment achieved a record high in its stock price after delivering another strong quarter that beat analyst expectations. The company has quickly approached full-blown studio status, on par with the likes of Warner Brothers and Universal. While there are some concerns as to whether the company can continue its impressive run of high-earnings films and television productions, investors must tip their hats to management for navigating a treacherous business and doing so with greater success than the gorillas in the space. Even at its fresh highs, is Lions Gate a buy?

Strong earnings
Compared with a net loss in the year-ago quarter, and doubling the average analyst estimate of $0.09 per share, Lions Gate earned an adjusted $0.18, helping bring the stock price to $35.50 -- its highest in history.

Sales rose an impressive 21% to nearly $570 million on the back of strong results in the company's film and TV departments. Lions Gate found a winner in the $75 million Now You See Me -- a film that has grossed well over $200 million worldwide. Streaming giant Netflix has already ordered its second season of Orange Is the New Black, a hit for both Lions Gate and Netflix. Since fiscal 2012, when the company had produced 430 TV episodes, Lions Gate now makes 1,000.

In the U.K., the company just wrapped its best year since inception, earning $150 million, and continues to push forward with $32 million in first quarter 2014 earnings. Well over half of the company's 18 productions this year are U.K.-based -- a relatively unique and interesting strategy.

Clearly, the company is doing well and has been able to put out content that ranges from mass appeal, such as The Hunger Games franchise, and more niche audiences, such as the Netflix series. But can it continue?

Some analysts and investors talk about the end of the hit series Mad Men (approaching its final season), and that there are no more Twilights to be made, and that The Hunger Games can't buoy the company forever. While each is true, to a degree, Lions Gate has its hand in plenty of other baskets.

First, the Hunger Games franchise is approaching only its second installment, and two more have just begun production. Moreover, the company has found success in the vast majority of its recent productions -- not just the ones that have lines of 13-year-old girls for miles. In 22 of the company's last 24 film productions, they've earned a profit. No John Carters here.

Lions Gate is producing television series for NBC, the History Channel, E!, Cartoon Network, FX, Amazon.com, Hulu, Netflix, and more. Though sad for viewers, the end of Mad Men will not run the coffers dry.

For a tough, tough business, Lions Gate is doing remarkably well, and the company has a great product pipeline to keep the earnings going. Even at its highs, valuation is reasonable, though by no means is the stock offering investors a discount at nearly 20 times forward earnings. But if getting a bargain isn't as important to you as an entertaining growth story, Lions Gate appears to be a solid choice.

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