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Lion's Roar

Posted: Aug 14, 2009 11:57 AM by Eugene Bukoveczky

Tickers in this Article: DTV, LGF, VIA, TWX, CBS, VZ, CMCSA, CVC

Shares of independent film producer Lions Gate Entertainment (NYSE:LGF) soared more than 12% following the release of first-quarter results that blew past analysts expectations. Lions Gate, the last independent studio still operating in Hollywood, surprised both analysts and investors by reporting net earnings per share of 30 cents for the quarter, or 21 cents on an adjusted basis, compared to the loss of 1 cent that analysts had been reporting.

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Found Their Niche
Revenues also rose 30% in the quarter, as the company's film and TV units both realized triple-digit gains. It appears that that there is still a huge public appetite out there for the type of "out there" entertainment fare that the studio has consistently produced. While it had managed to score a Best Screenplay Oscar for its coming-of-age flick "Juno", their main stock in trade has been in the splatter horror genre with titles like the "Saw" series, "My Bloody Valentine 3-D" and "Drag Me To Hell".

The company's small screen offerings also appear to have found a solid niche audience with shows like Emmy nominated "Mad Men" and the Showtime cannabis cult series "Weeds".

Corporate Raider Icahn Quiets Down
While most stock holders are undoubtedly delighted by the company's surprise strong showing, one major investor in the company, billionaire Carl Icahn, might be somewhat conflicted by the outcome. As a holder of about 16.9% of the company's stock, Icahn had complained about management's high spending ways in the past. It would now appear that he has less to complain about as the company did manage to shave expenses by $22 million in the latest quarter.

Further attempts by Icahn to up his stake now seem unlikely following his failure to raise his interest via the planned purchase of the company's convertible debentures and the Board appointment of another major stockholder friendly to management. But it also appears unlikely that he'll dump his stake so long as the going is this good.

Cable and Online Movie Competition Heats Up
Those prospects could continue to improve if the company's recent foray into the cable and online video on-demand market pays off. Lions Gate recently teamed up with Viacom (NYSE:VIA)-owned studio Paramount and Hollywood veteran MGM to launch movie channel Epix. Epix is targeted to compete directly with Timewarner's (NYSE:TWX) HBO service and CBS's (NYSE:CBS) Showtime.

A distribution deal has been locked in on Verizon's (NYSE:VZ) FiOS service, but analysts suggest that more such deals may be necessary to make the new channel work. That was recently made more difficult when Comcast (Nasdaq:CMCSA), Cablevision Systems (NYSE:CVC) and DirectTV (Nasdaq:DTV) all declined to carry the channel citing an oversupply of offerings in the movie channel space. However, with its huge 12,000 title library, Lions Gate could still have enough clout with its content to close a few more distribution deals.

The Bottom Line
The majority of analysts that have been bullish on this stock are likely to re-affirm their "Buy" ratings based on the latest quarterly results. That should further boost the positive sentiment on this stock. (For more, see Earnings Forecasts: A Primer.)

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By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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