MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA Lions Gate Entertainment Corp. (NYSE:LGF)-Long Jessica Jie Gao| Sep.26th, 2013 1 M c I n t i r e I n v e s t m e n t I n s t i t u t e AGENDA 1 • Company Overview • Main Thesis Points Ø Movie theatres help to boost earnings 2 Ø Television provides the company’s steady growth Ø Rapid expansion of distribution Ø Effective management and financial control 3 • Risks 4 • DCF Model 2 M c I n t i r e I n v e s t m e n t I n s t i t u t e COMPANY OVERVIEW • Founded in 1997, the youngest among top 10 Hollywood film production firms. • The largest independent film production firm • An international company with a presence in motion picture production, TV programming, home entertainment and channel platforms. • The producer of Twilight: Saga and The Hunger Games. 3 M c I n t i r e I n v e s t m e n t I n s t i t u t e COMPANY OVERVIEW 4 M c I n t i r e I n v e s t m e n t I n s t i t u t e STOCK OVERVIEW Price: 36.04 Inst.Own: 97% 52 week low-high: 14.56 – 37.81 Revenue: 2.7B Vol/Avg: 3.98M/1.27M Beta: 0.74 Mkt Cap: 4.64B EPS (ttm): 1.99 P/E: 16.97 5 M c I n t i r e I n v e s t m e n t I n s t i t u t e COMPANY OVERVIEW Other Segment Lionsgate 1% UK Mandate Sales 6% Pictures 3% Television Production 15% Theatrica l Internati 23% onal 16% Televisio n Home 12% Entertain Motion ment Pictures 39% 85% 6 M c I n t i r e I n v e s t m e n t I n s t i t u t e #1: FILM INDUSTRY Movie theatres help to boost earnings Thriving of film industry Low production cost Good contents: bona fide blockbusters Easy Targeted Market 7 M c I n t i r e I n v e s t m e n t I n s t i t u t e OVERVIEW OF FILM DIVISION • Over $400M at North America box office in the 1Q FY 2013, increased by 39.6%. • 7% North America theatrical market share, and 8.4% theatrical market share in foreign countries, including Latin America, Russia, the UK, an China. • Ranking the 7th in domestic movie market. 8 M c I n t i r e I n v e s t m e n t I n s t i t u t e THRIVING INDUSTRY “Domestic box office revenues grew 25% from 2006 to 2010 from $25.5B to $31.8B, and that. Worldwide entertainment industry grew from $449B to $745B.” --CCIA(Computer and Communications Industry Association) Best-of-industry Position: Box office revenues of Lionsgate have grown by 327.1% from 2006 to 2012, much higher industry average. 9 M c I n t i r e I n v e s t m e n t I n s t i t u t e LOW PRODUCTION COST Average historical production budget: Lionsgate: <$35M Major studio: >$70.8M (Major studios includes: Warner Bros., Universal, Walt Disney, 20th Century Fox, Sony Pictures, Paramount Pictures.) 10 M c I n t i r e I n v e s t m e n t I n s t i t u t e BONA FIDE BLOCKBUSTERS • Lionsgate has some of the best content in the industry, from movies to TV series. • 2 out of 7 most anticipated films in 2013 are from Lionsgate. (NY Times) • Bona fide blockbusters can be foreseen: Divergent Step Up Ender’s The Hunger Games: Jul, 2014 5: Game Catching Fire Upcoming Sep, 2014 Nov, 2013 Nov, 2013 young adult Potential to be franchises. The last 2nd part of the series. installment of turned into Two other parts will Step Up series. trilogies or be released in 2014 more. and 2015. 11 M c I n t i r e I n v e s t m e n t I n s t i t u t e BONA FIDE BLOCKBUSTERS Hunger Game: Divergent: Divergent book series is approaching the Catching Fire 300 million copies sold mark. At the current phrase Divergent is actually on the same track and same amount of sales as Hunger Games at this point in its release. Box office revenue of Hunger Games 1: • Domestic: $408M (NO.13) • Oversea: $283.2M (NO.58) • Analysts may currently be underestimating the potential of this movie, as the international box office is set to be much higher. • “Catching fire will gross approximately $950M worldwide when it opens in mid-November…” -- Alan Gould, managing director of Evercore Partners 12 M c I n t i r e I n v e s t m e n t I n s t i t u t e BONA FIDE BLOCKBUSTERS Most Anticipated films this fall: NO. Movie Name Trailer Views Book sales Production Company 1 The Hunger Game: 28,950,110 67,000,000 Lionsgate Catching Fire 2 Thor: the dark world 9,657,341 120,000 Walt Disney 3 The Ender’s Game 5,963,200 11,000,ooo Lionsgate 4 Gravity 7,125,020 - Warner Bro 5 Godzilla 186,611 4,300,000 Warner Bro 6 Wolf of Wall Street 114,929 1,700,000 Red Granite Pictures 7 The Wolverine 4,348,587 670000 20th Century Fox • Correlation between box office revenue and trailer views: 0.241 • Correlation between book sales and box office revenue: 0.619 • Correlation between comics sales and box office revenue: 0.334 13 M c I n t i r e I n v e s t m e n t I n s t i t u t e BONA FIDE BLOCKBUSTERS VAR: ONLINE SURVEY The questionnaire is designed to understand how young adults truly think of The Hunger Games and their preferences over film genre. *29 Reponses have been collected; due to the small sample size, the conclusion maybe biased. 14 M c I n t i r e I n v e s t m e n t I n s t i t u t e EASY TARGETED MARKET • Lionsgate targets young adults’ market which is easy to approach. • Lionsgate focuses on making adventure, action and horror movies. “A side benefit of our genre focus, whether in adventure or horror is we appeal to younger, digitally avid market.” -- Steve Beeks, Lionsgate’s CO-COO “Typically, the most dependable filmgoer have been the young adults who “goes to the movies” to get away from home. Young adults offer another feature that filmmakers love—they are an easy sell because they are lacking in discrimination and sophistication. --Dr. Anney Kodas, Professor in Media Studies, Rice University Company Target Market Favorite Genre Genres Market Share Lions Gate Young adults Adventure, Action, Horror 41.6% Dreamworks Teenagers Adventure, Science Fiction 21.38% Disney Kids of 4~12 Animation 17.6% Paramount Mix Romantic, Family, Comedy 52.37% 15 M c I n t i r e I n v e s t m e n t I n s t i t u t e EASY TARGETED MARKET Data from www.numbers.com Data from my online survey 16 M c I n t i r e I n v e s t m e n t I n s t i t u t e VAR: GENRE TREND AT US BOX OFFICE “A limited range of special effects-based films from the action/adventure and fantasy/science fiction genres have come to dominate the US box office at the Expense character- and narrative-driven films (crime/thriller and drama films) that were previously identified as the most popular.” -- “Genre trends at US box office, 1991~2010” by Nick Redfern 17 M c I n t i r e I n v e s t m e n t I n s t i t u t e #2: TELEVISION INDUSTRY Television provides the company’s steady growth Popular contents Misperception: Television is dying Cooperation with Netflix 18 M c I n t i r e I n v e s t m e n t I n s t i t u t e TELEVISION DIVISION OVERVIEW • Diversified television business is continuing its 13-year trajectory of profitable growth: compound annual growth rate has been nearly 25% since 2000. • Presence in nonfiction programming with more than 10 different series now ordered or airing in prime time. • Just acquires television rights to the #1 New York Times Bestselling series Crossfire. • Orange is The New Black is the most popular TV series on Netflix. • Weeds is the most popular TV series on Showtime. 19 M c I n t i r e I n v e s t m e n t I n s t i t u t e MISPERCEPTION #1 • Misperception: Televisions are dying. “Television as a delivery method has no trend to die; rather, the platform evolves with time and technology… Nowadays people prefer to watch television on websites such as Netflix, Gulu, and Amazon….” -- Fan Mai (PhD at Media Study Department, University of Virginia) • Steady growth higher than industry average 20 M c I n t i r e I n v e s t m e n t I n s t i t u t e VAR #3 CASE STUDY: THE FUTURE OF TELEVISION • “TV revolution” is coming due to the rise of on-demand viewing, particularly over Internet, such as Netflix, Gulu, and Prime Instant Video.