I was a huge fan of "The Hunger Games" when it was just a book. My daughter read it three times. Now, thanks to the movie, the whole country (and possibly the entire world) knows about "The Hunger Games," so I am turning my analyst eye to Lions Gate Entertainment (NYSE:LGF), the studio that produced and released the movie.
In the weeks prior to and the days just after the movie's release, the stock ran up approximately 47%, from $11 to a high of $16.19. Since then it has retreated, closing Monday at $11.80 -- 27% off its high.
I think this is a screaming buy opportunity. I can't understand why investors have abandoned the stock so quickly after that blockbuster movie release. I mean, the third-largest opening in history? Actually, it was the largest opening if you exclude sequels; "Harry Potter and the Deathly Hallows, Part 1" and "Dark Knight," both from Time Warner (NYSE:TWX), were the only two movies ahead of "The Hunger Games." Domestic box office receipts are well over $300 million so far, and the movie has just started being shown overseas. In fact, the movie has recently been approved for a June release in China.
And Lions Gate is not just relying on this one property. The company has some of the hottest entertainment franchises in town, including the "Twilight" series, "The Walking Dead," and "Mad Men." All are properties with millions of fans who are absolutely crazy about them.
The Lions Gate production pipeline is looking like a money-gushing tsunami, in my opinion. First, "The Cabin in the Woods" was just released, a tiny expense for Lions Gate but huge in terms of buzz. The movie only cost the company $12 million to acquire, but an intense movie trailer and lots of secrecy a la "The Blair Witch Project" enabled the movie to grab the No. 3 spot in its opening weekend. Since then, the film has grossed over $47 million.
Two other movies set for 2012 release bear mentioning as well. "The Expendables 2" (featuring Sylvester Stallone) is following up on its $275 million grossing action-packed original film, and "The Perks of Being a Wallflower" (starring Emma Watson) could possibly attract a large portion of the "Harry Potter" crowd.
Currently in development for 2013 release are some major potential blockbusters. One is "Ender's Game," starring Harrison Ford. It is based on a novel of the same name by Orson Scott Card, one of the seminal books in the science fiction category. It won both the Hugo and Nebula awards in 1985, and remains a favorite to this day. It has spawned numerous sequels. The movie is scheduled for release in November 2013.
Another series aimed at the teen market that should appeal to the same audience as "The Hunger Games" is the "Chaos Walking" trilogy by Patrick Ness. (Yes, trilogy: as in three books, three potential movies.) The first novel is called "The Knife of Never Letting Go," and in my opinion it was a remarkable book. Keep in mind you heard about it from me.
Perhaps the greatest potential for Lions Gate lies in a masterful book by first-time author Erin Morgenstern, titled "The Night Circus." Its combination of magic and romance got rave reviews from critics and readers alike, and this particular reader can tell you it was truly amazing.
Leadership at Lions Gate has been brilliant recently, with extensive use of social media and technology such as Netflix, Groupon, Facebook and Fandango. The company has quality production teams already being assembled for the three major movies in development, and I have no doubt that they will be as terrific as "The Hunger Games." (Let's not forget "Catching Fire," the "Hunger Games" sequel that's also in production, along with the third novel in the trilogy, "Mockingjay," waiting in the wings.)
The company's financials to date have been relatively spotty, but forward-looking investors realize that the past does not always predict future performance. The current fiscal year ended March 30, with results scheduled to be released on June 7. Analysts covering the stock are estimating earnings of $0.16 for FY 2012. Next year's consensus estimate is $1.29, a 700% gain. The current forward P/E is 8.9. Really, 8.9 for a company that is estimated to have 700% growth over the next year? The industry P/E is 18.0, and the lowest company in the industry group has a P/E of 15.2.
And if you're still unconvinced, Jim Cramer says Lions Gate is a buy at $10-$11: "It's down way too low. This is ridiculous."
I'm saying it's a buy with a price target of $20.