Thought I Saw a Saw, too (LGF)
Well, Lion's Gate (LGF -- free real time quote from ADVFN) got a nice boost today -- I've been holding this one for quite a while but haven't written much about them, so I thought I should sit up and pay attention.
**UPDATE (11/1): Just saw a good article in Marketwatch that was published late yesterday after I posted this -- lots of good points there, including that one of LGF's real strengths is the fact that they run their own film distribution, as well as more on Lion's Gate as an acquisition target -- worth a read.**
I bought my shares of Lion's Gate Entertainment in a couple purchases over the last six months, with my average purchase price being $10.47. So as you can see, I am a bit under water with this one even after the Saw II-inspired jump. Long term, I'm still confident that the company will succeed and I'll be amply rewarded.
Lion's Gate occupies a very nice niche in film and tv production, and I think it's one that's destined to be a money maker for them. There are two things that make them stand out for me as a solid investment:
First, they develop and/or buy low budget but potentially profitable films that the huge studios wouldn't be interested in wasting their time on, and give them a chance to succeed -- either with critics for sleeper hits, or with niche audiences, especially horror, that have a chance to break through without star power or big budgets. In some cases, they're able to build these films into franchises that can develop a strong following and open, as has the gruesome looking Saw II, with great weekend box office numbers. LGF's boost today was due to the fact that Saw II broke the weekend opening record for the studio with about $30 Million in ticket sales ... not shocking for most movies, but pretty impressive for a film that had a budget of about four million dollars.
If you make enough movies with potential and don't spend that much on them, the successes can really flow -- but it's still the movie business, so for every Crash that's a critical hit and makes back it's nut many times over, you've got a Lord of War that disappoints. As long as you're not making $200 million special effects spectaculars, you don't need to have a blockbuster every time. The same goes for the TV business -- they're doing great with Weeds on Showtime right now, and they have that silly reality show with Tommy Hilfiger and lots of smaller profile projects including some ABC Family stuff ... the key is, they have a lot of irons in the fire that have the potential to be profitable.
And second, they own tons of content, which I continue to believe will be a great long-term driver for their earnings. In the days to come when movies are even more easily available either online or on demand on your TV, the owners of those movies have a chance to really capitalize on their libraries -- and Lion's Gate has one of the best libraries out there, with everything from the old episodes of Moonlighting to Dirty Dancing to the Halloween movies and, according to the company, more than 8,000 other titles, including lots of successful films, television shows, and kids' fare. There's an interesting Motley Fool article about their latest acquisition, and it is key to note that they do keep building this library both through purchases of other studios and libraries and through their own productions.
Now, the fact that LGF focuses on it's library and on releasing film and tv properties that are low cost generally means that their earnings shouldn't be as lumpy as the blockbuster-driven studios -- we shouldn't see feast or famine here. But that's not necessarily how it has worked in practice. Right now, with Yahoo Finance numbers, they're trading at a PE of 100+ and a forward PE of under 20 ... so you can see it's not all a steady climb up the earnings ladder. They carry a fairly large amount of debt -- more than $400 million, a lot for a $1 billion company, but their free cash flow could pay that off in a couple years if necessary.
The key for me is that this is a small company with some growing film and tv franchises and a very attractive library of entertainment properties. Management has proven that they're able to find low cost properties and libraries and leverage them into enough success to keep the company growing, and I fully expect that they will build on this as we move forward. Mark Cuban, among others, apparently agrees -- he's invested in Lion's Gate as part of his position in theater and entertainment properties, which include HDNet, Landmark Theatres, and others. Lion's Gate has been bandied about for a long time as a potential takeover candidate, too, thanks largely to the value of their library, but it looks to me as though they want to make a go of it on their own (depending, I'm sure, on the offer).
So this is a fun one for me to watch -- interesting films and tv products that really stand out and sometimes make a lot of money but rarely lose much, some real potential for leveraging the content of their library into new media, and always that little chance that the big boys might come along with a pile of money to buy you out.
So when might I sell? Hopefully never, but the things that would scare me would be any big changeovers in management or a change of focus. Finding artistic talent and producing films is a business that relies on judgement, especially when you're not dealing with star-driven effects films, and I like the judgement of the guys that run the show today ... If they started to get excited about their press releases and left their zone of competency to put together a mega-budget Saw III with Arnold Schwarzenegger and Renee Zellweger and groundbreaking special effects, I'd start looking for en exit.
**UPDATE (11/1): Just saw a good article in Marketwatch that was published late yesterday after I posted this -- lots of good points there, including that one of LGF's real strengths is the fact that they run their own film distribution, as well as more on Lion's Gate as an acquisition target -- worth a read.**
I bought my shares of Lion's Gate Entertainment in a couple purchases over the last six months, with my average purchase price being $10.47. So as you can see, I am a bit under water with this one even after the Saw II-inspired jump. Long term, I'm still confident that the company will succeed and I'll be amply rewarded.
Lion's Gate occupies a very nice niche in film and tv production, and I think it's one that's destined to be a money maker for them. There are two things that make them stand out for me as a solid investment:
First, they develop and/or buy low budget but potentially profitable films that the huge studios wouldn't be interested in wasting their time on, and give them a chance to succeed -- either with critics for sleeper hits, or with niche audiences, especially horror, that have a chance to break through without star power or big budgets. In some cases, they're able to build these films into franchises that can develop a strong following and open, as has the gruesome looking Saw II, with great weekend box office numbers. LGF's boost today was due to the fact that Saw II broke the weekend opening record for the studio with about $30 Million in ticket sales ... not shocking for most movies, but pretty impressive for a film that had a budget of about four million dollars.
If you make enough movies with potential and don't spend that much on them, the successes can really flow -- but it's still the movie business, so for every Crash that's a critical hit and makes back it's nut many times over, you've got a Lord of War that disappoints. As long as you're not making $200 million special effects spectaculars, you don't need to have a blockbuster every time. The same goes for the TV business -- they're doing great with Weeds on Showtime right now, and they have that silly reality show with Tommy Hilfiger and lots of smaller profile projects including some ABC Family stuff ... the key is, they have a lot of irons in the fire that have the potential to be profitable.
And second, they own tons of content, which I continue to believe will be a great long-term driver for their earnings. In the days to come when movies are even more easily available either online or on demand on your TV, the owners of those movies have a chance to really capitalize on their libraries -- and Lion's Gate has one of the best libraries out there, with everything from the old episodes of Moonlighting to Dirty Dancing to the Halloween movies and, according to the company, more than 8,000 other titles, including lots of successful films, television shows, and kids' fare. There's an interesting Motley Fool article about their latest acquisition, and it is key to note that they do keep building this library both through purchases of other studios and libraries and through their own productions.
Now, the fact that LGF focuses on it's library and on releasing film and tv properties that are low cost generally means that their earnings shouldn't be as lumpy as the blockbuster-driven studios -- we shouldn't see feast or famine here. But that's not necessarily how it has worked in practice. Right now, with Yahoo Finance numbers, they're trading at a PE of 100+ and a forward PE of under 20 ... so you can see it's not all a steady climb up the earnings ladder. They carry a fairly large amount of debt -- more than $400 million, a lot for a $1 billion company, but their free cash flow could pay that off in a couple years if necessary.
The key for me is that this is a small company with some growing film and tv franchises and a very attractive library of entertainment properties. Management has proven that they're able to find low cost properties and libraries and leverage them into enough success to keep the company growing, and I fully expect that they will build on this as we move forward. Mark Cuban, among others, apparently agrees -- he's invested in Lion's Gate as part of his position in theater and entertainment properties, which include HDNet, Landmark Theatres, and others. Lion's Gate has been bandied about for a long time as a potential takeover candidate, too, thanks largely to the value of their library, but it looks to me as though they want to make a go of it on their own (depending, I'm sure, on the offer).
So this is a fun one for me to watch -- interesting films and tv products that really stand out and sometimes make a lot of money but rarely lose much, some real potential for leveraging the content of their library into new media, and always that little chance that the big boys might come along with a pile of money to buy you out.
So when might I sell? Hopefully never, but the things that would scare me would be any big changeovers in management or a change of focus. Finding artistic talent and producing films is a business that relies on judgement, especially when you're not dealing with star-driven effects films, and I like the judgement of the guys that run the show today ... If they started to get excited about their press releases and left their zone of competency to put together a mega-budget Saw III with Arnold Schwarzenegger and Renee Zellweger and groundbreaking special effects, I'd start looking for en exit.
Labels: LGF
This article posted by One Guy @ 10/31/2005 05:15:00 PM 0 comments
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