Long-Term Potential of Lions Gate Entertainment
Today I opened a position in Lions Gate Entertainment (it’s near an all-time high, why not?). Lions Gate (LGF) is a relatively small rising star in the movie/television production and programming field, with hidden gems (low-cost, high-revenue projects) including the Saw franchise and, most recently, the ongoing Hunger Games franchise. Lions Gate has substantial debt and some irregular cash flow production, but the company has proven its ability to manage debt over the past several years while increasing margins.
So long as the company manages to produce sufficient cash flow and allocate incoming cash to paying down its debt levels, I see a bright long-term future for the business. Over the past year the company has reduced its debt from $1.12 billion to $917.07 million (that’s a $200 million decrease in debt in one year).
Lions Gate has shown its ability to adapt to an evolving market for movies and television programming: namely, taking advantage of growing online distribution through avenues such as Netflix with “Orange is the New Black.” Gary Bourgeault, in an article for the Fool, outlines why this is especially beneficial for Lions Gate:
What's also important to the growth of the company is the partnerships it has engaged in with streaming sites such as Netflix, Amazon and Hulu. Netflix and Amazon are particularly important to the international growth of Lionsgate, according to CEO John Feltheimer:
"This is a portion of the market that will continue to grow significantly in the years ahead because of the demand for original content from Netflix, Amazon, Hulu, and other streaming companies."
Producing online content, in other words, opens Lions Gate to an expanding online and international market. Lions Gate is a relatively new and small player in the realm of movie/television production, but the company is demonstrably innovative and adapting to a growing online and international market. Lion Gate’s CEO, Jon Feltheimer, has been with the company since 2005 and owns 2.1 million shares of common stock, making him the largest direct individual holder of the company’s common stock.
Lions Gate has its share of risks; any company with substantial debt will be vulnerable financially. However, Lions Gate is getting its financial house in order while continuing to innovate with an expanding product line and partnerships with Netflix, Amazon, and Hulu, which expose the company to an expanding online and international customer base.
While Lions Gate is close to an all-time high today (what stock isn’t?), in the ballpark of $36.30, I felt compelled enough to open a position in the stock today. An innovative and expanding product line, improving financial situation, and experienced and involved management team all contribute to my confidence in the business as a new long-term shareholder.