Shares of Lionsgate Entertainment (NYSE: LGF-A) (NYSE: LGF-B) fell hard on Friday morning. Class A shares -- the ones with voting power -- plunged as much as 16.6%, while the non-voting Class B shares bottomed out with a 15.3% drop. As of noon EST, both stocks were trading approximately 13% lower for the day.
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That was the market's response to a solid third-quarter report.
Yes, you read that right.
Adjusted to account for the merger with premium cable TV giant Starz partway through the year-ago quarter, Lionsgate's top-line sales grew 8% year over year to land at $1.14 billion. Adjusted earnings more than doubled from $0.21 per share to 0.48 per share over the same period. Analysts would have settled for earnings of $0.23 per share on sales near $1.08 billion.
So it was a clean sweep against the Street's expectations. Free cash flows nearly quardupled from $41 million to $140 million. Encouraged by the strong cash generation, Lionsgate restarted its dividend program, which had been on pause since the Starz merger was announced.
And yet share prices plunged.
The answer to this riddle can be found in Lionsgate's earnings call. According to a Seeking Alpha transcript, CEO Jon Feltheimer told investors to expect high growth as the Starz network expands globally -- just not quite yet. Said Feltheimer:
CFO Jimmy Barge provided additional commentary:
So Lionsgate is producing lots of expensive, high-quality content for the Starz segment, in order to drive that asset's growth much faster when the investments start to pay off. The sheer scale of this project is pushing back the starting gate for the actual growth from 2019 to 2020, but investors should be compensated for this delay by a sharper upward trajectory for the long haul.
This is great news for serious investors, in my view. But all the market makers heard was a delayed growth strategy, making them forget all about fantastic third-quarter results and a more ambitious long-term growth trajectory.
That looks like a big mistake. This drop is not a harbinger of doom, but a wide open buy-in window.
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lions Gate Entertainment Class A and Lions Gate Entertainment Class B. The Motley Fool has a disclosure policy.
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