Shares of Lionsgate (NYSE:LGF) have been on fire in 2013. The company has managed to transform itself from a primarily low budget movie producer to up and coming power player in the movie industry. With two large productions upcoming in Ender's Game and The Hunger Games: Catching Fire, the company will be in the spotlight this coming holiday season. Here are some things to keep in mind about their films that may be overlooked this holiday season and a short term game plan for the stock.
Ender's Game is the first of two big budget movies that Lionsgate is set to release over the next month. The movie is based off of Orson Scott Card's novel of the same name and follows the story of "Ender" Wiggin, an unusually gifted child who is sent to an advanced military school in space to prepare for a future alien invasion. The film has an impressive cast that includes Harrison Ford, Ben Kingsley, Abigail Breslin and Asa Butterfield as "Ender". The movie is set to come out on November 1st.
There are a few things going against the film that could negatively impact its box office and possibly cause Lionsgate shares to drop, but provide an opportunity for an entry point for a long position (which will be explained later).
1) Film Boycott
Author Orson Scott Card has come under fire for his anti-gay views, which has spawned protests of the film by several organizations such as GLAAD (Gay & Lesbian Alliance Against Defamation)
2) Rocky Road to film
Ender's Game has been off and on in Hollywood for over a decade. The project first gained traction about 9 years ago when Warner Brothers contemplated bringing it to the big screen based on a script that Card wrote himself. The project eventually fell apart and Warner Brothers lost the rights to produce a movie based upon the book. Generally projects that fall into limbo status for a long time do not make box office smashes.
3) "Big Budget" and expected gross
The movie has an estimated production budget of $110 million and is only estimated to take in around $30 million during its opening weekend domestically. This would make it a challenge to reach the $100 million mark domestically.
On Monday, October 28th the stock price of Lionsgate sank $1.95 or 5.31% and on Tuesday, LGF fell another 50 cents or 1.44%. On Stocktwits investors were concerned that the lowered outlook for Ender's Game was the cause of the weakness. To investors who are thinking about investing in Lionsgate, Ender's Game could create an opportunity to take a long position in the stock. I highlighted some reasons that Ender's Game might underperform, but I believe that the impact of a weak Ender's Game box office will have a greater impact on the stock price than the actual health of the company. What many investors are overlooking is that despite the large budget that is estimated at $110 million, Lionsgate's equity invested in the film is much less than that. During the company's 1st quarter earnings call, there was a question asked about the company's stake in the film:
Caroline C. Anastasi - JP Morgan Chase & Co, Research Division
"Okay. And then, can you just give us a bit more color on Ender's Game and how much capital you have at risk there? And what kind of box office performance we should look for to make that film profitable for you guys?"
James Keegan - Chief Administrative Officer, Chief Financial Officer and Chief Accounting Officer
"We -- as we've said in the past, we're 25% of the equity investment in the film and a very low threshold as it relates to domestic performance in order for our breakeven."
If there is an Ender's Game flop, there could be an overreaction that causes the share price to drop, but not really have an adverse impact on the company itself. This could provide an entry point for an investor on the sideline.
Hunger Games: Catching Fire
The second installment in the Hunger Games series is set to release on November 22nd. Everyone knows that the film will be a great success, but the question is how big? I believe that the greatest amount of upside for Hunger Games is the international market. According to Box Office Mojo, The Hunger games grossed $408 million domestically and $283 million internationally for a total of nearly $700 million. Domestically, $408 million will be hard to repeat or beat, but the $283 million internationally provides plenty of opportunity to the upside. In the international market, the book series was not as big, but that started to change after the release of the first film. In a recent company press release, the growing popularity was highlighted in China:
"The release of the first Hunger Games film in China established a strong fan base on which Catching Fire is positioned to build," said Wendy Reeds, Executive Vice President of Content Sales & Distribution for Celestial Tiger Entertainment (CTE). "China has become one of the world's leading box office territories, and the release of The Hunger Games: Catching Fire in China is another major step forward in our distribution of film and TV content in this key market."
If you look at the Twilight series, which targets the same demographic as the Hunger Games series, you can see that as the series progressed the international box office take grew as well. This was also due to the book series gaining traction internationally after the release of the first film.
|Domestic||Foreign||Domestic %||Foreign %|
|Breaking Dawn I||281,287,133||430,884,723||39.5||60.5|
|Breaking Dawn II||292,324,797||537,360,640||35.2||64.8|
Investors should keep an eye out for the Ender's Game release and any opportunities an underperformance presents to start a long position in the stock. Regardless of that outcome, Catching Fire and the remaining Hunger Games movies are poised to provide revenue streams for years to come and propel Lionsgate to new heights in the future. To borrow a line from The Hunger Games, "may the odds be ever in your favor."
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LGF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: All investors are advised to conduct their own independent research into individual stocks before making a purchase decision.