Think Twilight Will Be Big for LGF? Just Wait

by Alyssa Oursler | November 15, 2012 2:07 pm

Tonight, fans will line up to watch Bella, Edward & Co. on the big screen for the last time as Twilight finale Breaking Dawn: Part 2 hits theaters.

The Twilight series began with the release of Stephanie Meyer’s young-adult book seven years ago and has since become a phenomenon, birthing “Twi-hard” fans and a host of vampire spinoffs — all while raking in piles of cash.

Film studio Summit Entertainment saw its top line explode after the first movie, with revenue quintupling in just two years[1]. Now, though, Summit — and the rights to the Twilight  franchise — belong to Lions Gate Entertainment (NYSE:LGF[2]), which closed on a deal for the smaller company back in January.

The four movies out so far have tallied more than $2.5 billion in worldwide sales, and the final installment is expected to easily top the $700 million Part 1 brought in. But if you think that Twilight will be a boon to Lions Gate … well, you ain’t seen nothin’ yet.

The End of an Era

Lions Gate is getting Twilight on its books at the the tail-end of the franchise’s reign. While money from sales of the first four movies is probably still trickling in, the company will feel a noticeable boost from only this final installment.

Don’t turn your nose up at that — Breaking Dawn: Part 2 should bring in a hearty chunk of cash. But that cash came at a price. Acquisition costs have weighed on Lions Gate’s shoulders for most of the year. For LGF’s first three earnings reports of the 2012 calendar year, the company reported losses. And more glaring? Each time, analysts were expecting profits.

Yet LGF shares have surged 84% since January. But that wasn’t on optimism about Bella. No, the belle of Lions Gate’s ball is Katniss.

Move Over, Bella

While Lions Gate investors have become something of Twi-hard fans themselves in anticipation of the tonight’s release, the film studio’s biggest appeal comes from its rights to a more recent young-adult obsession: The Hunger Games.

The first of the three bestselling novels — featuring beloved leading lady Katniss Everdeen — was released in 2008, and as of this summer, the trilogy had sold more than 50 million copies[3]. The first theatrical installation came out earlier this year and grossed $686.5 million — around 75% more than the first Twilight movie brought in.

That helped LGF finally have an earnings report to smile about. Just more than a week ago, Lions Gate reported that Q2 revenues nearly doubled, and that earnings came in at 53 cents per share — dwarfing analyst expectations of 10 cents per share — thanks to strong home-entertainment sales from The Hunger Games.

In fact, the company had so much cash coming in from the movie in recent quarters, it was  able to pay off the loan[4] it took out to buy Summit … four years early.

Not too shabby.

It’s an especially promising start considering the studio has three more movies (the final book, like Twilight, be broken into two parts) slated for the franchise, which will be annual events from 2013 to 2015.

Plus, each subsequent film in the Twilight series was more successful than its predecessor and became increasingly popular overseas. If the same holds true for the Hunger Games, watch out.

Beyond the Blockbusters

Of course, Lions Gate is more than a one-trick (or two-trick) pony. The company has had a number of popular — even if not blockbuster — titles that have helped its profitability. LGF cited Step Up Revolution and Madea’s Witness Protection, for example, in helping out during its most recent impressive quarter.

Plus, the studio has a growing TV business — it’s the brains behind popular shows like Weeds, Mad Men, Anger Management and Nashville — that’s the icing on the cake.

Lions Gate also owns the rights to Ender’s Game and Divergent — two popular young-adult book series that could be the next-big franchises. Divergent, for one, has already sold more than 2 million copies and is said to be “tracking ahead of both the Twilight and Hunger Games books at a comparable stage in their growth trajectory,” according to Lions Gate CEO[5] Jon Feltheimer.

Better Late Than Never

The real question for investors is whether it’s too late to invest in this growing film company and its blockbuster hits following its breakneck run in 2012.

The answer is “no” — it’s not too late.

While LGF indeed has a sky-high TTM price-to-earnings ratio (read: four digits), forward-looking numbers unsurprisingly look promising. LGF is trading at only 11 times projected 2013 earnings — lower than diversified media competitors Disney (NYSE:DIS[6]) and Time Warner (NYSE:TWX[7]), which each have a forward P/E of 12, and far cheaper than animated producer DreamWorks (NASDAQ:DWA[8]), which trades at 18 times forward earnings.

Meanwhile, LGF is projected to post incredible year-over-year growth of 220% this fiscal year, then 80% the next.

Lions Gate will have Twilight to thank in part, but unlike Twi-hard fans, it won’t be shedding tears once Breaking Dawn: Part 2 is over.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

  1. quintupling in just two years:
  2. LGF:
  3. sold more than 50 million copies:
  4. pay off the loan:
  5. according to Lions Gate CEO:
  6. DIS:
  7. TWX:
  8. DWA:

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