Lions Gate Entertainment (NYSE: LGF) is a stock I've been looking at for a long time. It often looked like a great trade. It actually was recently. On Monday, the stock closed at $6.26. That represented a great short-term rise.
I wish I had gone with my instincts and bought shares when they were below the $5 mark. But something always kept me from doing it. I was worried about the fundamental risk involved.
With the release of the studio's annual earnings on Monday after the bell, I really have reason to be skeptical about buying. Lions Gate reported an annual loss of $1.40 per diluted share in 2009 versus a loss of 62 cents per diluted share in 2008. Lions Gate used cash for operations, it didn't generate any.
And free cash flow? There was none of that. In 2008, the business created $137 million of free cash. In 2009, the company had negative $143 million in terms of free cash. Not a welcome comparison.
Lions Gate may have captured, as the headline to the earnings release proclaimed, "record" revenues of $1.47 billion, but costs and expenses rose as well, causing an operating loss. What's going on here? Lions Gate has a lot of interesting intellectual properties. It has a great portfolio of horror properties (e.g. Saw, The Haunting in Connecticut). And let's not forget Tyler Perry.
Still, at the end of the day, cash flow was negative. At one point while I was writing this, shares were down over 12% in after-hours trading. Later on, shares rebounded to a 6% loss before plummeting yet again to a double-digit sell-off. It will be interesting to see where the stock closes at the end of the regular trading session on Tuesday.
Can you still trade Lions Gate? I think you can under certain conditions. I've watched the stock trade off before and then bounce back.
But I think you have to understand the risks involved. It's not like trading a more established, more diversified media conglomerate such as Disney (NYSE: DIS) or Time Warner (NYSE: TWX). Trading just on technicals in this case might not be for the faint of heart. One could argue that the library assets under Lions Gate's control make the company a very attractive takeover target. In fact, I've argued that in the past, and I still believe in that thesis. However, buying just for that reason is pretty speculative. I'd rather have some better cash-flow characteristics to make me feel better about a trade here.
Nevertheless, I will watch the price action this week. If Lions Gate takes a huge dive, then it might become interesting.
Disclosure: I own Disney; positions can change without notice.
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