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The Movie Business Is Risky, But Might Pay Off in the End

Friday - 5/24/2013, 2:10am  ET

One of the biggest names in film and TV entertainment, Lions Gate Entertainment has grown tremendously over the past decade, with revenues up by more than 400% in that period. However, the company has a pretty poor record of profitability, posting losses in eight out of the past 10 years, and hasn’t turned a profit since 2007. With some successful acquisitions, and some even more successful new film franchises, analysts are projecting that the company will finally get its act together and start making some money. Is this turnaround candidate worth taking a chance on?

**Note: fiscal year 2013’s revenues include the recent Summit acquisition

About Lions Gate

Lions Gate owns a film and television library of over 13,000 titles, including the Saw franchise, the Tyler Perry films, and TV shows Mad Men and Weeds. Their largest recent success has been with the first Hunger Games film, the sequel of which is due to be released in November, and is already expected to be a massive hit. 

The company plans to release around 20 films this year, including the Hunger Games sequel, Catching Fire. Lions Gate also currently produces and/or syndicates 19 TV shows, a number it plans to increase in upcoming years.

Most of the company’s growth has been through acquisitions, including Trimark in 2000, Artisan Entertainment in 2003, and Mandate Pictures in 2007, just to name a few notable ones. Recently, Lions Gate acquired Summit Entertainment, which produced 31 films in the past four years, including the very successful Twilight series.

The Numbers: Not So Great…

One glance at Lions Gate’s earnings would make most investors head for the hills immediately. Despite rapidly rising revenues, Lions Gate only managed to turn a profit in two of the past 10 years.

However, the forecast calls for pretty rapid earnings growth over the next few years, due to such factors as the improving economy, synergies from the Summit acquisition, and increased income from their key franchises over the coming years. Lions Gate lost 30 cents per share last year, but is expected to finish this year in the green with earnings of $0.93 per share. This number is projected to grow to $1.34 and $1.69 per share in 2014 and 2015, respectively. While a traditional P/E analysis is meaningless here, trading for 16.2 times 2015’s earnings with the kind of growth rate that’s expected sounds pretty decent.

Alternatives

As an alternative to Lions Gate, investors could choose another comparably sized entertainment company such as DreamWorks Animation or a large, more diversified media conglomerate such as Walt Disney .

DreamWorks, whose franchises include Shrek, Madagascar, and Kung Fu Panda, produces computer-generated animated films. As an investment, it looks better on paper than Lions Gate, having turned a profit for nine out of the last 10 years, and is projected to return to profitability this year after a less-than-stellar 2012. Using the 2015 numbers to look to the future, like I did above, DreamWorks is projected to earn $1.27 per share that year, meaning that it trades for 17.3 times 2015’s earnings, a slight premium to Lions Gate.

Walt Disney is the most logical long-term investment here, especially for those who have less risk tolerance and/or a shorter time horizon. Studio entertainment only makes up about 14% of Disney’s business, although this will likely increase with the recent acquisition of Lucasfilm and its Star Wars franchise. The rest of Disney’s business is diversified among theme parks, media networks like ABC and ESPN, merchandising, video games, and more. 

However, Disney is a bit expensive right now, trading for more than 20 times earnings, well over their historic average of around 15. Disney does have a great track record of earnings growth, dividend raises, and a good share buyback plan to build shareholder value. They are hands-down the safest and most stable of the three.  I would wait for a little pullback from the all-time high that Disney’s shares currently trade for.

The Verdict

If you have low risk tolerance but still want exposure to the movie business, add Disney to your radar. On the other hand, if you believe the economy will continue to recover for several more years and that people will increase their discretionary spending, Lions Gate does offer a much higher potential over the long term, especially if the company can establish a solid track record of profitability.

It's easy to forget that Walt Disney is more than just the House of Mouse. True, Disney amusement parks around the world hosted more than 121 million guests in 2011. But from its vast catalog of characters to its monster collection of media networks, much of Disney’s allure for investors lies in its diversity, and The Motley Fool's premium research report lays out the case for investing in Disney today. This report includes the key items investors must watch as well as the opportunities and threats the company faces going forward. So don't miss out -- simply click here now to claim your copy today.

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