Examining Lionsgate Entertainment Corp (NYSE: LGF.A) could help answer the question can movies survive coronavirus?
Lionsgate (NYSE: LGF.B) is an anachronism because its main business is movie and TV production. That makes Lionsgate an odd duck in an entertainment industry where conglomerates with many businesses own most studios.
Disney (NYSE: DIS) operates theme parks, a video streaming service, and even cruise ships. In contrast Comcast (NASDAQ: CMCSA) is a cable company and Amazon (NASDAQ: AMZN) does everything. Meanwhile, today’s definitive entertainment brand, Netflix (NASDAQ: NFLX) is a streaming service.
In particular, Lionsgate only owns one video distribution channel the Starz cable services. In comparison, Disney owns three streaming services, Disney+, ESPN+, and 75% of Hulu.
Will Coronavius Kill Lionsgate?
In contrast, Lionsgate follows an old-fashioned business model of producing movies and series that other companies show. For example, CBS (NYSE: CBS) broadcasts Lionsgate’s McGyver show.
Thus, no entertainment company could be more vulnerable to coronavirus than Lionsgate. To explain, they closed all movie theaters in most countries to prevent the spread of COVID-19.
Furthermore, most people will not go to the movies if they think they can catch coronavirus there. Hence, I think it is probable movie theaters will never recover from coronavirus. My prediction is many movie theaters will never reopen.
Thus, Lionsgate will need a new business such as producing movies and series for streaming video to make money. Importantly, Lionsgate is streaming movies free on its YouTube channels. For example, Lionsgate is streaming several films free on its Lionsgate UK YouTube channel in the United Kingdom, Yahoo! Entertainment reports.
However, I cannot see how Lionsgate can make money by giving movies away. Perhaps, Lionsgate’s managers think they can make money from obnoxious YouTube advertisements.
Is Lionsgate Making Money?
Lionsgate (NYSE: LGF.A) lost money in the last reported quarter. For example, Lionsgate reported a -$39.50 million quarterly operating loss on 31 December 2019.
In addition, Lionsgate reported a -$91.20 million quarterly net common loss on the same day. However, Lionsgate made a gross profit of $403.90 million on revenues of $998.50 million for the last quarter 2019.
Given those numbers, I do not think Lionsgate is making enough money to survive. In particular, I do not think Lionsgate has a margin of safety.
Why Lionsgate Cannot Survive
I believe Lionsgate has no margin of safety because it reported a negative quarterly ending cash flow of -$37.10 on 31 December 2019. In contrast, Lionsgate reported an operating cash flow of $215.90 million on New Year’s Eve 2019.
Plus, Lionsgate had $195.50 million in cash and short-term investments on 31 December 2019. Additionally, Lionsgate reported $7.960 billion in total assets on 31 December 2019.
Thus, I think Lionsgate lacks the resources to survive as an independent company. My prediction is that some other entertainment combine will gobble up Lionsgate.
What Value Does Lionsgate have?
Lionsgate lacks many of its competitors’ attributes. For instance, Lionsgate does not own a major superhero franchise.
However, Lionsgate has movie rights to The Hunger Games. The Hollywood Reporter, claims a Hunger Games prequel is in the works at Lionsgate. They will base the prequel on the Suzanne Collins novel The Ballad of Songirds and Snake which they release on 19 May 2020.
The Hollywood Reporter estimates four Hunger Games films made $3 billion at the box office. Unfortunately, there could be no box office for the foreseeable future.
The lack of a box office could destroy Lionsgate because of the small amount of money it makes. To explain, Lionsgate’s business model is rely on big box offices to finance its operations. When there is no box office, Lionsgate could run out of money and collapse.
Why Lionsgate could be an Acquisition Target
Under those circumstances, I predict Lionsgate will end up as part of another company such as Amazon (NASDAQ: AMZN) or Netflix. I think Amazon or Netflix could buy Lionsgate to get exclusive content such as the Hunger Games and Outlander.
I believe there will be a race to buy such content because of all the content Disney owns through Fox, Marvel, Pixar, and Star Wars. To explain, Disney could be in a position to keep Star Wars, Marvel, Planet of the Apes, Buffy the Vampire Slayer, and other content off other platforms.
Thus, Amazon and Netflix will need to buy or develop their own content. I think Lionsgate is a tempting target because Lionsgate is too small to raise antitrust concerns.
Is Lionsgate a Good Stock?
I think Lionsgate Entertainment Corp (NYSE: LGF.A) is a lousy stock because it makes little money.
However, Lionsgate shares are cheap. Mr. Market was paying $7.15 for Lionsgate on 1 May 2020. However, that price was down from $10.81 on 2 January 2020. Thus, Coronavirus has hurt Lionsgate’s stock value.
Lionsgate is not a value investment because of its low price. Moreover, Lionsgate has not paid a dividend since 27 September 2018.
Ordinary people need to stay away from Lionsgate because this entertainment company could soon collapse. If you want to invest in entertainment in today’s world, I recommend investigating the Walt Disney Company (NYSE: DIS) and ignoring Lionsgate.
Originally published at https://marketmadhouse.com on May 2, 2020.