Is It Time to Bet On Lions Gate Entertainment?

By Michael Comeau  JUN 02, 2014 11:15 AM

The company needs a new franchise to get the stock moving again.

 


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A Minyanville reader named Anthony asked the following:

Michael,

Do you think Lions Gate (NYSE:LGF) is a buy here off Friday's decline?

Lions Gate took an 11.5% hit on heavy volume on Friday on its weaker-than-expected fiscal fourth-quarter earnings report, and as of this morning, it's now down 31% from the $37.81 all-time high hit from September 2013.

However, I am very wary of the stock here.

The huge run Lions Gate made from the summer of 2011 to the peak last year came because of surging optimism regarding The Hunger Games franchise. It was a classic case of Wall Street catching up to a Main Street phenomena. 

But the stock ran out of gas because that $37.81 print priced in a ton of future growth, while simultaneously it became obvious that The Hunger Games couldn't power the stock forever.

So it was time to look to new mega-franchises. Ender's Game disappointed, and while Divergent has performed decently from a financial perspective, it's a Hunger Games-type powerhouse.

Now Lions Gate does have an attractive TV and film content library that helps it benefit from growth in streaming content providers like Netflix (NASDAQ:NFLX) and Amazon.com (NASDAQ:AMZN). It could also make Lions Gate an attractive acquisition target for a media giant like Disney (NYSE:DIS) at some point.

But at the end of the day, big movie franchises are what move this stock. There are two Hunger Games films left, but we're a long way from 2011 when Wall Street was completely ignorant of the franchise's potential. So I'm not quite ready to bet on a third pre-Hunger Games rally.

Longer term, what I'll actually be keying off is Lions Gate's Mighty Morphin Power Rangers reboot. We live in time where almost any classic character franchise can be rejiggered into a blockbuster if the marketing and execution is right. Godzilla is a prime example.

There are few details right now, but if buzz can build around a director or production team, don't be surprised if investors fall into a pattern of extrapolating that into future earnings expectations.

In the near term, I'll be watching to see how Michael Bay's Teenage Mutant Ninja Turtles remake shapes up. If it looks like it can put up big numbers, the stage could could be set for a Power Rangers-driven rally in Lions Gate

Twitter: @MichaelComeau


No positions in stocks mentioned.

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