Carl Icahn and Insiders Were Right About This Stock

Lions Gate Entertainment (NYSE: LGF), one of the largest film and television distributors in North America, has seen their fortunes rise precipitously in recent months.  Entrenched as a key player in the struggling motion picture industry, shares of LGF have almost doubled in value since last September. While the company has ridden a wave of successful blockbuster films including “Twilight: Breaking Dawn Part 1” and “The Hunger Games,” there are plenty of other reasons to be excited about this stock.

Carl Icahn

For starters, hedge funds are particularly hunky-dory about the film distributor.  MHR Fund Management, Miura Global Management, Highbridge Capital Management, and Citadel Investment Group all held long positions in LGF as of the end of last year.  Adding speed to this proverbial locomotive, insiders are clamoring to buy the stock – the company’s director Mark Rachesky purchased 11,040,493 shares at 7 bucks a pop on August 29th of last year.  In the same month, LGF’s largest shareholder Carl Icahn bought 745,840 additional shares to increase his total holdings to 45,529,291.  It is safe to say each of these investors have booked a positive return from the stock, as it has recently hit a 5-year high of $16.19 per share, and currently rests at a share price of $14.06.   Recall this article, which lists Lions Gate Entertainment as the seventh most coveted stock by hedge funds and insiders.  This status is significantly bolstered by the stock’s recent momentum, and better days may still be on the horizon.

When diving deeper into the stock’s fundamentals, we can see that it is fairly valued by looking at its Price-to-Sales ratio.  LGF currently has a P/S of 1.4, which is below the industry average of 1.6 and most of LGF’s publicly traded competitors.  For example, Walt Disney (NYSE:DIS), Dreamworks Animation (NASDAQ:DWA), and Viacom (NASDAQ:VIAB) all have P/S ratios above this mark. It is worth mentioning why this ratio is used instead of a more conventional alternative like the Price-to-Earnings ratio.  In the motion picture industry, P/E ratios are practically worthless tools of investment analysis because earnings figures can be distorted by accounting practices that record future revenues before they are actually made.

Speaking of revenues, LGF’s have been growing by an average of 12.4 percent since 2007, adding weight to the old adage that in times of economic distress, the entertainment industry provides consumers a shoulder to cry on.  Currently hovering around the $1.5 billion range, analysts estimate that 2013 revenues will break the $2 billion mark.  Aside from the recent release of “The Hunger Games,” which had the third best opening weekend of all time grossing $155 million, these estimates are contingent upon the successes of upcoming projects like “Twilight: Breaking Dawn Part 2,” “Ender’s Game,” and the hit TV show “Madmen.”

Furthermore, Lions Gate Entertainment has been heavily involved on the M&A front, having recently acquired privately-held Summit Entertainment LLC for $412.5 million with the confidence that the move will bolster its position in international markets.  While part of LGF’s overseas weakness has been attributed to the company pre-selling distribution rights to cut costs, the acquisition of Summit Entertainment LLC is meaningful. Summit was originally founded as an international film distributor, so this move is kind of like Achilles putting on a steel-layered boot.  As an industry, the motion picture realm has a significant growth opportunity abroad, due to the fact that the U.S. accounts for less than 20 percent of the world’s nearly 1 billion TV households.  In most cases, some of the most popular movies outside of the U.S. are those that have multiple sequels, something that LGF has definitely noticed – many of its most successful franchises are trilogies.

Finally, for investors looking for exposure in the motion picture industry, LGF is one of the only stocks that is publicly available.  Other major competitors DreamWorks Studios, Imagine Entertainment and Metro-Goldwyn-Mayer Inc. are all privately held.   All in all, the behavior of hedge funds and insiders, LGF’s fundamentals, and recent acquisition of Summit Entertainment LLC make Lions Gate Entertainment (LGF) a buy.

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