JPM Answers Call of the Wild, Initiates Lionsgate At Overweight

More movie news today: J.P. Morgan analyst Monica DiCenso initiated coverage of Lionsgate Entertainment (LGF). 

She writes that the move is in reaction to the company’s popular franchises, growing television business and strong free cash flow, which she expects will combine to boost the stock.  She expects films with strong brand awareness, like the much-anticipated Hunger Games movie due out this weekend, will be a boon Lionsgate, while its TV segment grows more profitable over time. 

Here are highlights from her initiation note out today:

Hunger Games is just the beginning – expanded film slate and shift to more branded properties should support better theatrical outlook. We believe eight of LGF’s planned 15+ theatrical releases in F13 are branded properties (including Hunger Games which is poised to be LGF’s biggest theatrical release to date), which tend to perform better theatrically than non-branded, up from 2-4 branded films in prior years. With a solid slate anticipated for F14 as well, we expect LGF’s theatrical business to be more steady and profitable in upcoming years.

 Demand for TV content remains very robust. The proliferation of over-the-top providers has created heightened demand for LGF’s TV product as broadcast and cable networks invest to retain viewership and digital providers aim to expand their exclusive offerings and attract more subs – making quality content more valuable than before. LGF has had great success in TV to date (Mad Men, Weeds) and has numerous programs in development slated for upcoming release. Also, as existing programs mature and enter syndication, profitability should improve, driving better TV margins in the intermediate term and helping balance theatrical volatility.

Conservative production approach helps limit downside in an inherently risky business. While we believe that LGF’s slate looks promising, successful entertainment properties can be difficult to predict, making its conservative production approach appealing. Through international pre-sales, relatively conservative budgets, and strategic production agreements, LGF has been able to minimize write-offs and help mitigate some of the risk inherent in its business.

Transformative franchise and improved financial outlook make LGF shares attractive. At 18.3x F13 EPS LGF trades at a discount to its closest peer, Dreamworks (DWA) at 18.7x, and below its historical range (~21x) despite shares already rallying 40% this year. We believe that the Hunger Games franchise will be transformative for LGF and drive significant profitability for years to come, which when combined with upside from more branded films planned and continued growth at its TV business, gives us confidence in the outlook. Our December 2012 price target of $18 is based on a P/E multiple of 22x our F14 EPS of $0.82, in line with its historical average.