Lions Gate Entertainment (LGF) may have found the sweet spot in media.
While most media stocks have taken substantial hits this year, Lions Gate Entertainment (LGF) , with its prime television content, is countering the declines. The movie and television production company has gained 17% this year while losing just 3.3% over the past month, a stark contrast to Time Warner (TWX) , another film and TV producer, which has lost 18% in 2015 and slipped 20% over the past month.
The big difference between the two companies is Time Warner's exposure to the decline in advertising revenue through cable-TV networks such as TBS, TNT and CNN. Similarly, Viacom (VIAB - Get Report) has fallen 42% this year, CBS (CBS - Get Report) is down 22%, 21st Century Fox (FOX) (FOXA) has dropped 31%. Even Walt Disney Co. (DIS - Get Report) has declined 13% over the past month.
Why do investors like Lions Gate? In short, it's often mentioned as a takeover target by a large technology company eager to break into media/entertainment (think Facebook (FB - Get Report) , Google (GOOG - Get Report) (GOOGL - Get Report) or even Apple (AAPL - Get Report) and Netflix (NFLX - Get Report) ), and also because it has a very healthy television production. Everyone in video wants high-quality original programming.
"The demand for and number of buyers of premium scripted TV content continues to rise," said Amy Yong, a media analyst at Macquarie in a Sept. 4 note. "There are 20+ traditional/digital distributors in North America alone and international buyers are now in the [thousands], increasing the value of Lionsgate in the food chain."
Yong has a 2-month price target of $46 on Lions Gate shares, trading on Friday at $37.79.
"Pay TV is getting a lift from the rising demand for broadband as well as industry consolidation," Yong said. "The need for speed and capacity is accelerating due to rapid demand for online video."
Investors are also relishing the fact that Epix, a joint venture of Viacom, Lions Gate and MGM Studios, is moving its video streaming partnership to Hulu from Netflix, triggering Buy ratings from firms like Wunderlich. Epix's subscription video service provides hits like Marvel Studios' Avengers and upcoming original programming like Graves with Susan Sarandon and Nick Nolte and espionage drama Berlin Station, both of which are scheduled to be released next year.
Hulu, which is more focused on television content and is the only video streaming provider to offer Showtime shows, has a monthly subscription rate of $7.99, the same as Netflix. It announced an $11.99 commercial-free option Sept. 2.
"We regard the transition [to Hulu] as long-term strategic positive," said Wunderlich analyst Matthew Harrigan in an Aug. 31 note, which also set a price target of $43. "It seems very plausible that moving away from Netflix will better enable Epix to secure new traditional premium cable distribution, especially with Comcast (CMCSA - Get Report) ."Lions Gate also said last week that it will adapt Gearbox Software's blockbuster video game Borderlands into a feature film. Since its launch in 2009, the Boarderlands franchise has sold more than 26 million copies of the action role-playing first-person shooter video game worldwide.