Lions Gate fills up on 'Hunger Games'

The blockbuster should propel the relatively small Canadian studio to new heights -- and there's more where this film came from.

By MoneyShow.com Mar 26, 2012 1:45PM

Image: Hollywood (© Comstock/SuperStock)By David Milstead, The Globe and Mail

 

I suspect you may have heard of "The Hunger Games" by now.


You may also have heard of Lions Gate Entertainment (LGF), the studio company that brought "The Hunger Games" to the box office this weekend.


If you are a regular VOX reader, you may recall a "buy" recommendation last September when LGF shares were trading around $7, or a 100% gain ago. (Hey, I'm open about my mistakes, so I'm also going to remind you of the good calls.)


My premise at the time was that the analysts were badly underestimating the potential of the "Hunger Games" franchise. Doug Creutz at Cowen & Co., who had an "outperform" rating at the time, modeled domestic box office of $70 million for the first film. Given that the film easily doubled that in its first weekend, that estimate was way off.


What made me suspect that was low? In part, the trading of "The Hunger Games" "shares" on the Hollywood Stock Exchange, a website that allows users to trade shares of upcoming films.


The price on HSX is based on the first four weeks of U.S. box-office expectations, which make up 80% or more of the total. And last September, HSX priced "The Hunger Games" at $184 million.


Analysts have come around, significantly boosting their expectations for movie and for the cash flow it will provide Lions Gate. But are they still behind? Perhaps so.

  • James Marsh of Piper Jaffray, in moving his LGF price target from $14 to $20 on March 2, said he was raising his domestic box-office target from $180 million to $225 million, which at the time was above analysts' consensus.
  • David Joyce of Miller Tabak, in raising his LGF target price from $14 to $17 on March 20, said movie "could" generate $100 million to $110 million in its first weekend and "could go on to be a $300 million film."
  • Benjamin Mogil of Stifel Nicolaus, in raising his target price from $15 to $17.50 on March 21, says he has raised his Hunger Games box-office expectation to $300 million.

What does the Hollywood Stock Exchange say? In midday trading Wednesday, "The Hunger Games" was priced at $331.6 million.


What is the import of a better-than-expected performance? Nearly pure profit and cash flow for Lions Gate.


Lions Gate has rights to four "Hunger Games" films. Marsh of Piper Jaffray believes the costs of the first film are fixed at around $130 million, meaning there's "massive operating leverage" now that it has become a blockbuster.


Nine months ago, when he estimated a mere $100 million in domestic box office for the first film, he modeled profits for the entire four-film series at $130 million. When he boosted his estimate to $225 million in box office, his model revised the total profit estimate to $1.4 billion.


"The key point here is that a 125% increase in domestic box office results is almost 1,000% growth in profits," he says. "Hunger Games will be the single largest film in the history of the company, and we get to multiply it by four."


There's no doubt that "The Hunger Games" is the single largest economic driver for a small company such as Lions Gate, which booked just $1.3 billion in revenue, companywide, in the past 12 months. By contrast, Walt Disney (DIS), a $40 billion company with $5 billion in annual profit, can afford a disaster like "John Carter," whose $100 million-plus loss was also easily foreseen by Hollywood Stock Exchange.


However, if the prospect of Lions Gate's being a one-trick pony worries you, fear not. The company -- legally based in Vancouver but doing much of its work from Hollywood -- acquired Summit Entertainment in January, giving it ownership of the "Twilight" vampire series, which has "Breaking Dawn Part 2" scheduled for November.


The company also produces the cable series "Mad Men," which it reminded folks when it sent the show's exceptionally attractive cast to ring the opening bell at the New York Stock Exchange on Wednesday.


And it has a number of other films in the works, including the sequel to the surprisingly successful Sylvester Stallone film "The Expendables." Marsh says, "Any objective look at the Lions Gate slate over the next 18 months or so reveals a remarkable list of films."


It also augurs what could be another remarkable run for the stock. You don't need the Hollywood Stock Exchange to bet big on Lions Gate -- the NYSE will do.

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