Why Has Lions Gate Stock (LGF) Been So Volatile Lately?

It has been about a month since the last earnings report for Lions Gate Entertainment (NYSE:LGF) , and quite a bit has changed since then. LGF had an excellent earnings report for Q4, beating the Zacks Earnings Estimate of $-0.02 by $0.15, for a whopping surprise of 750%.

On May 25^th, the day of the announcement, LGF stock surged 13.9% to $22.50 after-market hours, ultimately reaching a three month-high of $23.43 a few days later on June 3^rd. However, at a current price of $21.58 and sitting at a Zacks Rank #4 (Sell), things have taken a turn for the worse. Let’s take a look at what has gone wrong with LGF shares.

Why Did They Beat Earnings in the First Place?

When analyzing LGF’s current situation, it’s important that we first look at what gave the stock the aforementioned surge in the first place. LGF pulled in Q4 revenue of $791.2M, a 22.5% year-over-year increase, also surpassing the Zacks Consensus Estimate of $741M. This was due mainly to a surge in television revenues as well as its five box office releases in the quarter.

LGF reported adjusted earnings of $0.49 per share, however this was still significantly lower than the $1.39 of a year before. However, LGF was more active in Q4 than in Q3, releasing five films compared to the previous three. Because 85% of the firm’s revenue comes from films, it is clear why they had a comparatively better earnings report in Q4.

However, an important note is that in fiscal 2016, LGF experienced an 11.3% decline in Theatrical revenues as well as a 12.5% decrease in Home Entertainment revenues. This was due largely in part to missed expectations from some of the firm’s key films, such as The Hunger Games – Mockingjay Part 2 as well as The Divergent Series: Allegian.

Although theater performance wasn’t stellar, Television Production revenues cushioned the blow, with revenues jumping 15.6% to $669.9 million, due largely to a 69.2% boost in international revenue. A 34.6% boost in home entertainment revenue also provided much-needed help.

Now that we understand that the positive earnings report wasn’t completely rainbows and sunshine, let’s explore what has changed since then.

What’s Going on Now for LGF?

As our team pointed out, May 2016 box office collections fell 27.3%. The Q2 box office outlook continues to remain bearish, and even with the strong earnings report, LGF stock has still fallen over 42% in the past year. Although LGF is up about 5% today on chatter that it may merge with Starz Entertainment (NASDAQ:STRZA) and continues to pay a solid dividend yield of about 2%, there are plenty of glaring issues remaining.

In the last 60 days, analysts have had a 100% agreement in downward earnings estimates for Q1, Q2, the current fiscal year as well as the next one. The Zacks Consensus Estimate currently projects a loss of $0.20 per share in Q1, down drastically from the estimate of $0.31/share in profits just 30 days ago. This, coupled with an average EPS surprise of -19.90% for the last four quarters—including a nearly 1,000% miss in one quarter—paints a bleak outlook for LGF’s future.

LIONS GATE ETMT Price and EPS Surprise

LIONS GATE ETMT Price and EPS Surprise | LIONS GATE ETMT Quote

VGM Doesn’t Lie

LGF currently has rather mediocre grades of ‘C’ in Value, Growth and Momentum. The most promising sector for LGF currently is television, and since that only accounts for 15% of the firm’s revenue, there can only be so much upside.

With two more films scheduled for release before their August 4^th earnings announcements, LGF doesn’t really have anything left to pull out of its back pocket. Operating in a very difficult industry, LGF has to continue selling tickets to survive, and the current trend of diminishing theatrical revenues is not doing much for investor confidence.

It is possible that LGF’s television and international revenues can help cushion the blow once more, but with its current VGM and downward estimate projections, there isn’t much to be excited about.

Outlook

The magnitudes of the downward estimate projections are bloody, with a current Q1 revision trend of -155.6% and a not much better -100% for Q2. With such grim estimates and a shaky track record, investors can see why LGF currently sits at a Zacks Rank #4 (Sell).

LGF has made blockbuster films in the past and has some interesting titles slated for release over the course of the next year. However, we believe the company remains a sell, at least for the next few months. For more long term portfolios, this could potentially be a good time to buy in, but a lack of growth and fairly consistent disappointments leave much to be desired.