Lions Gate Entertainment Corp.

Transcription

1 February 26, 2015 Lions Gate Entertainment Corp. (LGF-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 08/19/2013 Current Price (02/25/15) $32.97 Target Price $ Week High $ Week Low $25.20 One-Year Return (%) 7.24 Beta 0.52 Average Daily Volume (sh) 1,327,699 Shares Outstanding (mil) 140 Market Capitalization ($mil) $4,611 Short Interest Ratio (days) Institutional Ownership (%) 56 Insider Ownership (%) 44 SUMMARY Lions Gate s third-quarter fiscal 2015 results failed to impress investors, wherein both the top and bottom lines fell short of the Zacks Consensus Estimate. The only respite being was a 4.8% jump in earnings per share on the back of solid domestic television performance, reduced marketing expenses, lower effective tax rate and the global release of The Hunger Games: Mockingjay Part 1. Revenue remained muted as the fall in Motion Pictures revenues more than offset strong television production revenues. Despite a subdued performance, we cannot ignore the company s effort to build a diversified portfolio, through strategic acquisitions and alliances. To participate in the growing trend among consumers accessing films over the Internet, Lions Gate has purchased interests in alternative distribution channels. Given the pros and cons embedded in the stock, we currently maintain our Neutral view. Risk Level * Below Avg., Type of Stock Large-Growth Industry Movie/Tv Pr&Dis Zacks Industry Rank * 158 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Jun) (Sep) (Dec) (Mar) (Mar) Annual Cash Dividend $0.25 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 16.6 Earnings Per Share (%) Dividend (%) N/A A 707 A 744 A 786 A 2,708 A A 499 A 840 A 722 A 2,630 A A 553 A 751 A 675 E 2,428 E E 589 E 854 E 803 E 2,740 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year using TTM EPS 23.1 (Jun) (Sep) (Dec) (Mar) (Mar) $0.33 A $0.53 A $0.27 A $1.10 A $1.57 A using 2015 Estimate $0.10 A $0.08 A $0.59 A $0.34 A $1.10 A using 2016 Estimate $0.27 A $0.16 A $0.66 A $0.42 E $1.50 E 2016 $0.22 E $0.22 E $0.80 E $0.52 E $1.76 E Zacks Rank *: Short Term The quarterly figures may not add up to annuals due to rounding off 1 3 months outlook 3 - Hold Projected EPS Growth - Next 5 Years % 25 * Definition / Disclosure on last page 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Founded in 1986 and headquartered in Vancouver, Canada and Santa Monica, CA, Lions Gate Entertainment Corporation (LGF) is a film studio, which produces and distributes motion pictures for theatrical and straight-to-video release, and television programming for the cable and broadcast networks. Lions Gate s crown jewel is its library of approximately 16,000 motion picture titles and television episodes and programs, which are distributed directly to retailers, video rental stores, and pay and free T.V. channels in the U.S., Canada, the U.K., Ireland, Australia and indirectly to other international markets through its subsidiaries and third parties. To gain distribution for its large film library, Lions Gate launched a new premium channel called EPIX with Metro-Goldwyn-Mayer Studios (MGM) and Viacom. The company has a 31.2% equity interest in EPIX. Lions Gate other acqusition includes the following: Celestial Tiger Entertainment Limited (Celestial Tiger Entertainment - 16% equity interest acquired in January 2012), a diversified media company looking after the operation of pay television channels, content creation and content distribution mainly targeting Asian consumers. Pantelion Films (a 49% interest acquired in September 2010), focusing on the production and distribution of English and Spanish language feature films to target Hispanic audience in the U.S. Roadside Attractions, LLC (Roadside Attractions - 43% interest acquired in July 2007), an independent theatrical distribution company. TVGN (TV Guide Network - 50% interest ) is a entertainment network co-owned by Lionsgate and CBS Corporation. The 50/50 joint venture formed in March 2013 syndicates CBS s programming, production and marketing assets with Lions Gate motion pictures, television and digitally delivered content. Defy Media - In June 2007, Lions Gate acquired a stake in Break Media, a multi-platform digital media company and a male-oriented content creation and distribution. Later on, in October 2013, Break Media amalgamated with Alloy Digital, a multi-platform digital media company having a foothold in the youth market, to create Defy Media. Defy Media combined Break Media s maleoriented sites with Alloy Digital's high rated YouTube channels and websites to firm position across important categories including entertainment, women and men's lifestyle, comedy and gaming. Lions Gate holds a 20% stake in Defy Media. MovieFriends is a theatrical movie discovery service, in which the company owns a 12.3% interest. Tribeca Short List is a subscription video-on-demand service in which the company holds a 75% economic interest. The company reports through two business segments: Motion Pictures: It is engaged in the development and production of feature films; acquisition of distribution rights in North America and worldwide; North American theatrical, home entertainment, and television distribution of feature films produced and acquired; and worldwide licensing of distribution rights to feature films produced and acquired. Equity Research LGF Page 2

3 Television Production: It is involved in the development, production and distribution of television software including television series, television movies and mini-series and non-fiction programming worldwide. REASONS TO BUY Lions Gate has a strong track record of producing small and mid-budget specialty films. Most of the company s productions have budgets of $35 million or less. Films intended for theatrical release are generally budgeted in the range of $10 million to $35 million, and films for video or cable television release are budgeted between $1 million and $5 million. The company always seeks strategic acquisitions and alliances to enhance its competitive position, to maximize return, and to build a diversified portfolio for future growth. The company s endeavors include acquisition of TV Guide Network properties, and creation of new premium channel called EPIX in joint venture with MGM and Viacom. Lions Gate acquired Summit Entertainment which further expands its filmed entertainment library while boosting its feature film and home entertainment offerings. It also extended domestic distribution deal with Miramax clinching an additional 250 titles, taking the total count for distribution to over 700. Lions Gate has collaborated with Tribeca Enterprises to introduce a subscription video on demand service to cater to the fast growing online viewership. The company also made a major investment in Telltale Games, one of the leading game developers and publishers, thus making an entry into the game arena. The investment is seen as a part of the company s diversification strategy. To mitigate the risk related to film production, Lions Gate enters into co-production agreements to share costs with other parties involved in production or pre-sells international distribution rights before the completion of the film. Moreover, keeping production costs low often involves paying talent low upfront salaries and awarding financial participation in a film s profits. The company released 13 motion pictures theatrically annually in fiscal 2014, including in-house productions, co-productions and acquisitions from third parties. In fiscal 2015, it intends to release about 13 to 15 motion pictures. Moreover, the company also buys approximately 15 to 20 platform titles every year that are released theatrically via Roadside Attractions and other third parties like Film Arcade. Lions Gate currently produce, syndicate and distribute 34 television shows on 22 networks and distribute hundred of series globally. We believe that the company would take its television business to new high in fiscal 2015 through sustained production and distribution of original content. REASONS TO SELL The escalating cost of motion picture production and marketing in recent years may jeopardize Lions Gate s margins. The continuation of this trend may leave no other option for the company than to depend more on lower revenue generating options such as home video and television, which may not suffice to offset the cost of production. To grab its share of box office receipts, Lions Gate competes with other major studios such as Fox Entertainment Group, Paramount Motion Pictures Group, Time Warner and Sony Pictures Entertainment, all of whom release a significant number of motion pictures during school or national holidays. On the contrary, Lions Gate, which faces budget constraints, does not release films during peak release times, which lowers its potential revenue. Equity Research LGF Page 3

4 Lions Gate sells DVDs and Blu-ray discs of its own production and acquired films to retail stores such as Wal-Mart Stores, Best Buy, Target and Costco. However, it does not have any long-term contract with these retailers, and the cancellation of orders by any of them may adversely impact the company s operations. In fiscal 2014, Wal-Mart accounted for 40% of net home entertainment packaged media revenue. RECENT NEWS Lions Gate Misses on Q3 Earnings & Revenue February 5, 2015 Lions Gate Entertainment Corp. posted lower-than-expected third-quarter fiscal 2015 results. The company s adjusted earnings of $0.66 per share missed the Zacks Consensus Estimate by a penny but jumped 4.8% year over year. The improvement in adjusted earnings, which includes stock-based compensation, was backed by solid domestic television performance, reduced marketing expenses, higher interest from equity investments, lower effective tax rate and the global release of The Hunger Games: Mockingjay Part 1. Interest income from equity investments was mainly driven by Lions Gate s EPIX pay television business with Viacom, Inc. (VIA) and Metro-Goldwyn-Mayer Studios Inc. On a GAAP basis, the company delivered earnings of $0.65 per share, up 10.2% from the prior-year quarter. However, the top line of this film and television production company plunged 10.5% year over year to $751.3 million and missed the Zacks Consensus Estimate of $767 million. Revenues remained soft as the fall in Motion Pictures revenues more than offset strong television production revenues. During the third quarter of fiscal 2015, the company s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of roughly $146.8 million declined 9.2% from the same period last year. Segmental Performance During the reported quarter, Motion Pictures revenues of $590.1 million plunged 22.1% year over year, reflecting weak performances across Theatrical (down 32.9% to $186.4 million), Home Entertainment (down 11.6% to $170.9 million), Television (down 21.6% to $82.9 million) and International (down 32.2% to $79.4 million), partly compensated by Lionsgate U.K. (up 12.2% to $62.7 million). Other revenues of the segment remained flat year over year at $7.8 million. Within the Motion Pictures segment, theatrical revenues fell as the quarter saw only two releases, Mockingjay Part 1 and John Wick. On the contrary, in the third quarter of fiscal 2014, the company had 4 theatrical releases. The fall in Home Entertainment revenues is attributable to lower theatrical slates in the quarter along with lower revenues from Managed Brands. Likewise, International Motion Pictures revenues descended on account of lower number of releases compared with last year. Also, Television revenues at Motion Pictures slumped year over year as the quarter witnessed only 1 theatrical release Divergent, compared with 5 releases in the prior-year quarter. However, Insurgent its next Divergent series movie is slated for release on Mar 20, in theatres worldwide. Equity Research LGF Page 4

5 On the contrary, strong revenues at Lionsgate U.K. were fuelled by a robust pipeline in the quarter, including the releases of Mockingjay Part 1, The Expendables 3, The Railway Man and Postman Pat: The Movie. Television Production revenues soared 95.9% to $161.2 million, largely stemming from the strength witnessed at domestic television (up significantly to $124.4 million), international revenues (up 15.1% to $23.6 million), home entertainment category (up 67.1% to $12.2 million), partly offset by other revenues (down 60% to $1 million). Shows including Anger Management, Orange is the New Black, Nashville, Ascension, Mad Men and Manhattan bolstered revenues at the television production segment. Alongside, game and talk shows like Celebrity Name Game, Family Feud and The Wendy Williams Show made significant contributions to the segment. Financial Details Lions Gate ended the quarter with cash and cash equivalents of $28.9 million with film obligations and production loans of $737.6 million, and shareholders equity of roughly $668 million. Management remains impressed with its digital initiatives as these endeavors added to the revenues and profits in the reported quarter. Going forward, the company expects further contributions from its digital undertakings. These undertakings include its recent collaboration with Tribeca Enterprises to introduce a subscription video-on-demand service to cater to the fast-growing online viewership. The company, along with giants likes CBS Corporation (CBS) and Time Warner Inc. (TWX), made this move in order to grow in the television market and create a seamless direct-to-customer network. Lions Gate is a film studio engaged in the production and distribution of motion pictures for theater and straight-to-video release as well as television programming for cable and broadcast networks. Equity Research LGF Page 5

6 VALUATION Lions Gate s current trailing 12-month earnings multiple is 23.1X, compared with 33.4X industry average and 18.5X for the S&P 500. Over the last five years, Lions Gate s shares have traded in a wide range of 18.1X to 696.0X trailing 12-month earnings. The stock is also trading at a discount to the peer group, based on forward earnings estimates. Our target price of $35.00, 23.3X 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Lions Gate Entertainment Corporation (LGF) Industry Average S&P News Corporation (NWSA) DreamWorks Animation SKG Inc. (DWA) World Wrestling Entertainment Inc. (WWE) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Lions Gate Entertainment Corporation (LGF) Industry Average S&P Equity Research LGF Page 6

7 Earnings Surprise and Estimate Revision History Equity Research LGF Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of LGF. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 8.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research LGF Page 8