Smart Investing


March 23, 2012


Think twice before buying Lions Gate

There is a lot of buzz about the fifth season of "Mad Men." I must disclose that I have watched the show a couple of times and just can’t get into the craze. I’m not sure what I’m missing — maybe the 1960s were a bad time in my childhood and I just don’t want to revisit that time again.

But what is important is that the masses love the show, and just because Brent Wilsey doesn’t like it doesn’t mean it won’t make money. "Mad Men" airs on the cable channel AMC, so this has been a big boast for it and its owner Lions Gate Entertainment Corp., which trades under the symbol LGF.

The movie “The Hunger Games” premiered on Friday with a lot of hype and fanfare. Maybe I watch too much financial TV like Bloomberg and CNBC and read too many company financial reports, but I knew nothing about this book that was written back in 2008 and has become a big craze.

To quickly fill you in, the book and the movie are about an annual event in which one boy and one girl aged 12-18 from each of the 12 districts surrounding the Capitol of Panem are selected by lottery to compete in a televised battle in which only one person can survive. This is a trilogy, so there will be two more releases in the next few years. Lions Gate adapted the book into a movie and is expected to have a triple hit on its hands, which will roll in the profits.

Many investors may think it is a good idea to jump in and buy Lions Gate with these big hits coming their way, but before anyone gets too excited about investing in this company, let’s check some of the facts.

Lions Gate is located in Santa Monica, Calif., and employs about 486 people. The company's market cap is just less than $1.9 billion, and the stock has a 52-week range of $5.76 to $16.19. The company reports on a fiscal year basis, and year-end numbers will be coming out shortly. The company's fiscal year ends in March, so it will report probably sometime in April. The mean of 10 analysts are looking for full-year earnings of only 5 cents per share. It may be worth noting that for the recent quarter ended December 2011, the company lost a penny when the estimate was for a 9 cent profit. Oops.

Looking farther down the road toward the fiscal year ending March 2013, the earnings-per-share picture looks much better on the surface. The mean of nine analysts are looking for a nice bump up in earnings to $1, and this estimate is up 53 cents from just 90 days ago.

But a deeper look at the numbers reveals that one analyst is looking for full-year earnings per share of 40 cents, which would be a forward PE of 37, on the high side. Another analyst is looking for full-year EPS to be $2.57, yielding a very attractive FPE of 5.7. Based on the current mean estimate of $1, the forward PE is 14.7, which is not too bad, but real close to falling out of the "buy" category for me. Please don’t forget about the $2.17 range from the low to the high estimate; it really lacks any conviction that the $1 estimate is a strong number.

Lions Gate has said it plans to pay off half its debt on the balance sheet, which would be a positive because the company has long-term debt of $597 million and equity of only $38 million. If you ever heard the term "highly leveraged" and wasn’t sure what it meant, this is a good example of a highly leveraged company. A big loss on a movie deal could put this company over the edge, and the stock would drop like a rock.

I’m also not sure where the company will find the nearly $300 million to pay off its debt. It only has $53 million in cash and short-term investments. Maybe the company is planning on using its cash flow in the next year from "Mad Men" and "The Hunger Games." But will that allow the company to invest in other movies and shows as these franchises lose their luster, and come 2014 the company has nothing generating any worthwhile profits?

While nobody knows the answer to these questions, investors should realize this is a high-risk investment, whether you like "Mad Men" and "The Hunger Games" or not.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


March 23, 2012