Profit off Lions Gate share of 'The Hunger Games'

The movie franchise has 'Harry Potter' and 'Lord of the Rings' potential.

By InvestorPlace Feb 21, 2012 10:44AM

By Jonathan Berr

Shares of Lions Gate Entertainment (LGF) have almost doubled during the past year as investors bet that the "The Hunger Games" trilogy would be a huge box-office hit. The already-lofty expectations of fans of the stock, including Jim Cramer, might be too low.

Cramer recently argued that "The Hunger Games" franchise could be worth more than $400 million to Lions Gate. For once, the host of CNBC's "Mad Money" might be underselling something. Based on recent Hollywood history, "The Hunger Games" has the potential to equal or surpass the $1 billion-plus franchise values of "Harry Potter" and "Lord of the Rings."

Surprisingly, Wall Street isn't yet inline with Cramer's view of "The Hunger Games'" potential for LGF. Analysts have an average one-year price target of $12.56 on the studio's stock, which is about where it trades now. Lions Gate, though, is a compelling value. Its price-to-earnings ratio of about 60, which while lofty compared with other media stocks, is well below its five-year high around 82.

And if things go well, Lions Gate can milk fans of "The Hunger Games" for at least four years.

Since it was first published in 2008, Suzanne Collins' post-apocalyptic novel has been a hit with children and adults alike. The book has appeared on The New York Times bestseller list for more than three years. Indeed, there are more than 16 million copies of all three books in Collins' trilogy in print in the U.S, including more than 7 million copies of "The Hunger Games" according to publisher Scholastic Corp. (SCHL).

While it's usually a bad idea to buy stock in a giant media company such as Time Warner Inc. (TWX) based on one hit movie or TV show, "The Hunger Games" is an exception to that rule. Since Lions Gate is not even one-tenth the size of Time Warner, the box office success of "The Hunger Games" will be felt much sooner at the studio's bottom line than if it were made by a larger company.

Lions Gate also has to keep a close eye on its bottom line to compete with much larger industry players. The Hollywood Reporter estimated that "The Hunger Games" cost about $78 million to make, which probably is about average for Hollywood, but cheaper than other franchise films such as "The Twilight Saga: Breaking Dawn Part 1" and "Spider-Man 3," whose costs reportedly both topped $100 million. Odds are strong that unless "The Hunger Games" is "Waterworld" terrible, it will turn a profit.

Let's not forget merchandising, which is a big deal for franchise films. Two of the three top-selling DVDs in 2011 were "Harry Potter" movies. "The Hunger Games" has fans that are equally as passionate. The first official trailer for the movie has more than 7 million views on YouTube, and the second one has 1.53 million views. The hype around "The Hunger Games" is so intense that some critics are concerned it could backfire.

"It's a dark, dense story, full of killing and misery and sacrifice, without nearly the opportunity for playful whiz-bang that "Harry Potter" offered," according to "The trailer looks about as good as you could ask it to, given the casting decisions."

If that is the most negative comment about "The Hunger Games" that is published, it will be a box-office smash.

Still unconvinced by this small-cap company? You could always go large-cap and find out how Time Warner still has more magic up its sleeve after being in Wall Street's penalty box for so long. 

Andrew Lander contributed to this report. As of this writing, Jonathan Berr and Andrew Lander did not hold a position in any of the aforementioned securities.

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Feb 27, 2012 8:56AM
Hunger Games.....coming to a reality near you!
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