Lions Gate Looks Good for the Long Haul

by Jonathan Berr | March 27, 2012 7:00 am

Lions Gate Looks Good for the Long Haul

Lions Gate Entertainment’s (NYSE:LGF[1]) The Hunger Games has lived up to its considerable hype and may propel the film studio into Hollywood’s elite. The question for investors: Is it too late to get in on the action? Maybe not.

While Lions Gate shares aren’t cheap — they trade at a price-earnings ratio of 72.28 — they’re below their five-year high P/E of 82.05, according to Reuters. The average one-year price target for Wall Street analysts[2] is $16.40, about 8% higher than where it currently trades (at $15.18, up 4.5% on Monday). If The Hunger Games becomes a $1 billion franchise, as I predicted it would[3], those price targets may prove to be conservative.

The post-apocalyptic tale of a teenagers fighting to the death in a televised spectacle grossed $155 million in its opening weekend, the third-highest opening weekend performance in history, trailing only Harry Potter and the Deathly Hallows, Part 2 and The Dark Knight. Several trends were evident in the film’s early performance that should hearten investors.

First, unlike the Twilight movies, The Hunger Games doesn’t pull at the heartstrings of just teenaged girls. According to The Wall Street Journal[4], “The audience for the film was 61% female, with 56% of ticket holders over the age of 25.”

That indicates the movie’s appeal went beyond the core fans of the dystopian novels by Suzanne Collins. This franchise has legs. Reviews for The Hunger Games have also been largely positive[5], which will bring more people into theaters. Hard-core fans also will view the movie many times, which will whet their appetites for three other follow-up films based on Collins’ books.

In terms of immediate profitability, The Hunger Games cost about $80 million to make, which is cheap by today’s Hollywood standards, considering Walt Disney’s (NYSE:DIS[6]) box-office dud John Carter[7] reportedly cost $250 million to make and has only grossed $62.3 million so far. The Hunger Games already is Lions Gate’s top-grossing film, surpassing Michael Moore’s documentary Fahrenheit 911, according to Box Office Mojo[8]. Lions Gate management did a good job controlling costs on The Hunger Games, so they’re not likely to become profligate spenders on the rest of the films in the series.

Perhaps most important for investors, The Hunger Games isn’t the only trick up Lions Gate’s sleeve. The studio is also home to filmmaker Tyler Perry[9], who may not be a critical favorite but has grossed more than $500 million. The studio also is responsible for cable-TV hits Mad Men, Weeds and Nurse Jackie, which are critical and fan favorites. It also generates license fees from the more than 11,000 TV shows and movies that are in its library.

However, Lions Gate has had its share of box-office flops too, such as its attempt to reboot the Conan the Barbarian franchise. The Hunger Games, though, is such a huge hit that Lions Gate’s flops are a distant memory.

CEO Jon Feltheimer and Vice Chairman Michael Burns, who spent three years battling billionaire Carl Icahn’s efforts to take over the Santa Monica studio, should feel vindicated by the success of The Hunger Games. Icahn had argued that Feltheiner and Burns were spending too much money on film production, overhead and botched mergers.

Last August, Icahn agreed to sell his 44.2 million shares for $7 each, breaking even on his investment after deciding he’d rather chase bigger deals. That decision cost Ichan a $331 million profit based on Friday’s closing price.

–Jonathan Berr never misses an episode of Weeds, and he doesn’t own shares of the companies mentioned here.

Endnotes:
  1. LGF: http://studio-5.financialcontent.com/investplace/quote?Symbol=LGF
  2. Wall Street analysts: http://www.reuters.com/finance/stocks/financialHighlights?symbol=LGF.N
  3. as I predicted it would: http://investorplace.com/2012/02/lions-gate-entertainment-lgf-the-hunger-games/
  4. The Wall Street Journal: http://online.wsj.com/article/SB10001424052702304177104577303870822231942.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsSecond
  5. have also been largely positive: http://www.cbsnews.com/8301-31749_162-57403284-10391698/the-hunger-games-reviews-what-critics-are-saying/
  6. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  7. box-office dud John Carter: http://investorplace.com/2012/03/somebody-should-pay-for-disneys-john-carter-mess/
  8. Box Office Mojo: http://www.boxofficemojo.com/studio/chart/?view=company&view2=allmovies&studio=lionsgate.htm
  9. Tyler Perry: http://www.boxofficemojo.com/people/chart/?view=Actor&id=tylerperry.htm

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