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Both Old and New Franchises Push Lions Gate Up


Investors have plenty of reasons to be impressed and even more to look forward to, including two new potential franchises.

On Tuesday, analysts at Wunderlich raised their target price on shares of Lions Gate Entertainment Corp. (NYSE:LGF) from $28 to $34. The firm currently has a buy rating on the stock. This move follows a similar sentiment by analysts at Stifel Nicolaus, who last week reiterated their "buy" rating on the stock, and raised the price target from $25 to $29. While it seems like Stifel Nicolaus' price target will soon be reached, if Wunderlich is correct, there is still plenty of upside left in the share.

Investors have plenty of reasons to be impressed and even more to look forward to. Lions Gate has seen revenue increase 400% over the past decade. It recently acquired Summit Entertainment, which produced over 30 films in the last four years, including the incredibly profitable Twilight franchise. Lions Gate has had its own share of successful franchises including the Saw franchise, Tyler Perry films, and most recently The Hunger Games franchise. Catching Fire, the second installment of The Hunger Games franchise, is expected to hit theaters in late November.

Also, Lions Gate had an impressive performance at Cannes last week. The studio generated a record $250 million in sales, up 50% from last year's figures. This figure does not include the markets where Lions Gate distributes directly, such as the UK or its distribution partnerships abroad, most notably its partnership with Universal Pictures in India.

With all of its recent success, Lions Gate has built up plenty of momentum to drive it past analysts' estimates for the fourth fiscal quarter. Analysts predict that LGF revenues will grow 13.5% and EPS will turn positive. Piper Jaffray analysts noted that the key to share performance for Lions Gate is to look for new franchises. Lions Gate is currently working on two new potential franchises: Ender's Game and Divergent. Both are due out within a year.

LGF opened at $28.06 on Tuesday. Lions Gate has a 52-week low of $11.63 and a 52-week high of $28.18. The stock's 50-day moving average is currently $25.16. The company has a market cap of $3.79 billion and a P/E ratio of 95.34.

Lions Gate is set to release its next quarterly earnings report on May 30.

My Trade: Buy the LGF June 25-30 call spread for about $3.25
Risk: $325 per one lot
Reward: $175 per one lot
Breakeven: $28.25

Greeks of this Trade:
Delta: Long
Gamma: Long
Theta: Short
Vega: Long
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