Over the weekend, Ender's Game topped the domestic box office with $28 million, though it is hard to consider that a victory for Lionsgate (NYSE:LGF). Since producing mega-hit The Hunger Games last year, Lionsgate has been trying to find another franchise to produce reliable results for its studio. It appears likely that Ender's Game will be no such franchise. While the film did notably better than other studio's attempts at a young adult franchise like Beautiful Creatures, The Host, and Mortal Instruments, Ender's Game did 20% of the opening weekend business of The Hunger Games while costing more.
Lionsgate-Summit spent $110 million to produce the film while spending many millions more on a ubiquitous ad campaign but generated only moderate interest. The film also received a strictly mediocre CinemaScore of B+ from audiences, which suggests word of mouth won't help the movie hold well in coming weeks to recoup its budget. Worse, Ender's Game will face intense competition with Thor 2 poised to earn $90-$100 million next weekend and The Hunger Games: Catching Fire coming two weeks after that. With average word of mouth and serious competition, I expect a weak 2.5x-3.0x multiplier for Ender's Gross, meaning a domestic gross of $70-$84 million. Remember, theaters keep 45% of ticket sales, meaning LGF will only recoup $38-$46 million at the domestic box office.
Early returns don't suggest international will be a savior either with a weak $1.9 million start in the UK and only $9 million overall, though LGF hedged some of this risk by selling international distribution rights to foreign studios. When it's all over and with home video revenue, Lionsgate might be able to break even on Ender's Game, so while it didn't cost shareholders any money, it will not spawn another franchise.
Investors need to recognize that apart from The Hunger Games, LGF's performance has been relatively poor. While Now You See Me was a surprise hit, Red 2, The Last Stand, Escape Plan, and The Big Wedding were all disasters. Last year, even The Expendables 2 underperformed. The preponderance of evidence suggests that Lionsgate does not have a skill at building franchises and if anything was lucky with The Hunger Games.
Yet since its release last year, LGF shares have added $2.7 billion in value, which suggests The Hunger Games' profits will be recurring events. In reality, they function as stand-alone cash flows, and based upon my optimistic expectations, the present value of those cash flows are $1.045 billion after taking out production and advertising expenses from US, International, and Home revenue.
Where does this other $1.65 billion in value come from? The rest of the film studio is really no stronger than it was when The Hunger Games was released. Its library and TV studio have been performing well, but they remain relatively small. Thanks to shows like Anger Management, earnings in those segments are up about $20 million; giving those extra earnings a 15x multiple finds $300 million in value. Still, LGF is overvalued by $1.35 billion or $10 per share. This is rooted in the misguided hope that The Hunger Games was a sign of things to come from LGF, meaning its cash flows should not be treated as one-time events. Ender's Game is further proof that Lionsgate may be nothing but a one-hit wonder. Shares are not reflecting this and are severely overvalued. They should trade at $25.