Peace Arch Entertainment (PAE) is a Canadian film producer and distributor. PAE profits by purchasing film libraries then selling distribution rights. Also, PAE produces their own movies. These will generate future revenues which are not currently reflected in the financial statements. We consider PAE a small Lions Gate Films with tremendous upside. Industry veterans took control of PAE about a year ago and have significant insider ownership. Now, onto the update:

Peace Arch Entertainment (PAE) announced results for the quarter and year ending 2006 at the end of November. As expected, revenue increased at a large clip over the last year. The company showed a loss as a result of the ramp up in their business by hiring more people and producing more films. As expected, the Canadian DVD distribution arm kaBoom! Entertainment continues its growth in revenues and profit.

What does this mean?

The income statement doesn’t look good, and the traditional value investor would high-tail it out of this company, however we are no traditional value investor. It gets worse; the loss this year equals more than 10% of their market cap. What is not shown in the financials are the finished films sitting collecting dust. Most films gain added recognition when they enter theatres, and Peace Arch not being a theatrical distributor must rely on film festivals to showcase the uniqueness of their films. Peace Arch has many high profile productions waiting to be distributed, including award winning film Delirious and John Lennon-themed production Chapter 27, both of which are being showcased at the Sundance Film Festival. Peace Arch has also produced a high profile mini-series about King Henry VIII that is being shown on Showtime in the near future. All of these impressive assets are sitting on the balance sheet at cost, and not represented in the income statement; yet.

Their Strategy

Top priorities going forward are to build brand name awareness by creating high-profile films and expanding their film library. Building brand awareness will allow the company to be on the shortlist of production companies that filmmakers will want to work with; this allows Peace Arch to produce better productions. Expanding film libraries will allow the company to demand higher prices from retailers in Canada through their distribution arm, kaBoom! Entertainment and will provide long-term recurring revenue.

How'd they do?

Two of their films are opening the Sundance Film Festival and they acquired a 500 film library; they performed to expectations. They also signed many alliances with companies like Sony, Showtime and Genius Productions, as well as acquired more than 20 low-budget films, which should bolster next years revenue.

Expected Results

We expect Peace Arch to continue to develop their properties, grow their revenue and reputation. We cannot be sure when the company will be profitable, but looking at the impressive productions that will be producing revenue this year, we can be sure it will be a banner year for the company, in terms of revenues and reputation.

Additional Information

More information about the management and the company is available on PAE's investor site.

The Globe and Mail article on the new Peace Arch

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Disclosure: Author is long PAE.