Lions Gate Entertainment (NYSE:LGF) is the company behind several movie franchises and television shows. The company is a small movie distributor compared to larger movie companies like Time Warner (NYSE:TWX), Disney (NYSE:DIS), Viacom (NASDAQ:VIA), News Corporation (NASDAQ:NWS) and Sony. With a market capitalization of under a billion dollars one movie or franchise has the potential to move the needle a lot more at Lions Gate then these larger media conglomerates that have other branches.
The company has been releasing movies since the 1990s and has recently started to distribute movies that cross the $100 million mark on a regular basis. The company’s highest grossing movies to date have been Fahrenheit 9/11 ($222m), the Saw franchise (I: $103m, II: $148m, III: $165m, IV: $139m, V: 114m, VI: 68m, VII: 136m), and The Expendables ($275m). The studio has been successful with the Saw series, Transporter movies and Tyler Perry’s Madea films.
The company has a huge possibility in its Hunger Games franchise. The movies will be based on the best-selling book series by Suzanne Collins. The plot of the books center around a post apocalyptic World named Panem. The world has an annual televised competition that pits children against each other in a last person survived contest for all to see. The idea actually came to the author while channel surfing between reality television and footage from the Iraq War. The book series consists of three books: Hunger Games, Catching Fire, and Mockingjay. The distribution rights worldwide for these movies are with Lions Gate Films.
The first movie will be released by the company in March of 2012. The other two books will be turned into movies as well and currently rest with Lions Gate Films unless someone of course buys out Lions Gate due to the success of the first movie. The movie has a current budget of $75 million and is shooting now. The movie stars Jennifer Lawrence, Liam Hemsworth, Josh Hutcherson, Donald Sutherland, Woody Harrelson, and Lenny Kravitz. For a look at how this movie could do at the box office I am using the following for comparison. ($ in millions)
|I am Legend||2007||$257||$329||$585|
For this example I used Twilight due to the fact it is based on a book and centers around a love triangle much as Hunger Games does. Death Race is an example of killing and being the last person standing to win something. Harry Potter was based on a best-selling book and part of a series as well. I am Legend is the top grossing movie based in an apocalyptic world. Saw was the first movie in the successful series from Lions Gate. What does looking at the success of these movies say for the future results of Hunger Games? Here are my predictions ($ in millions):
|Hunger Games (2011)||$75||$210||$200||$410|
|Catching Fire (2012)||$83||$265||$300||$565|
Total projected worldwide box office gross - $1640 million. The potential for over $1.5 billion from three movies could significantly impact a company with a market capitalization of under $1 billion. The seven movies in the Saw franchise have brought in $873 worldwide and have helped put Lions Gate on the map of film distribution companies.
Along with its movie library the company has the successful television shows Weeds, Nurse Jackie, House of Payne and Mad Men. While the company waits on the success of Hunger Games it has these television shows to help pad the bottom line.
Lions Gate Film has been the speculation of takeovers with activist Carl Icahn on its board. Icahn even at one time offered $7.50 per share in a hostile takeover attempt. Icahn continues to accumulate shares and pressure the company to get the most value for shareholders. The company is attractive with its lower market capitalization and its large library of films and upcoming movies. The company would fit in well with a larger media conglomerate and Icahn is likely to push for any attempt made by a competitor. A large amount of debt with over $750 million may deter likely suitors.
In 2008 Lions Gate Films was in the process of merging with Summit Entertainment. Summit is the company behind the Twilight movies, which ended up being turned into five movies based on four books. Looking back it is too bad that the deal fell through for Lions Gate. The sequel movies, which would have been part of the merged company, have been more successful at the box office worldwide than the original Twilight movie. The deal with Summit Entertainment fell through due to issues concerning how to transfer content.
I wrote in a previous article that Lions Gate Films and AMC (NASDAQ:AMCX) should merge together. The combined company would own the AMC Channel, TV Guide Channel, IFC, Sundance Channel and WeTV. These combined channels would give the company a place to showcase a movie and television show library while capitalizing on advertising revenue and cable subscription fees.
How to play the success of the Hunger Games trilogy would be to buy shares of undervalued Lions Gate Films. Shares of Lions Gate under $8 are a gift. The shares are undervalued and have been for quite a long time. The company's all time high price for shares is around $12 and the shares could meet that mark by the release of the second movie.
Scholastic (NASDAQ:SCHL) is the publisher of the book series and will see a benefit in increased reading interest around the time of release for all the movies. Scholastic also has the rights to the Harry Potter movies and has been successful with owning several large book series that do well in the movie theater. Also look at Scholastic shares on dips.
Box office figures are obtained from boxofficemojo.com. All $ amounts are in millions unless otherwise specified.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.