With the film industry turning out some of the highest grossing films of all time and cinema attendances simultaneously reaching record lows, it may cause some to wonder as to the future viability of the film industry as a whole, and more importantly, the future of specific companies such as Lions Gate Entertainment Corp. (LGF).
With multi-billion dollar film franchises such as the Twilight saga now behind them and the sequels of the Hunger Games series ahead, many stipulate that Lions Gate Entertainment has a very bright future. However with film attendances dwindling in domestic markets and the dramatic decrease of DVD sales accelerating, long-term holders of the position need to maintain caution. In recent years, many film studios have begun to move away from focusing on domestic profits, and have in turn, sought to gain them from foreign markets instead. As a testament to this China has shown to be an extremely profitable market, and as result, many films are now being tailored to accommodate broader audience demographics. The following will outline the potential future stock performance of Lions Gate as a result of a series of variables that lay ahead in coming months.
The First thing we should address with regards to Lions Gate is the health of the company. Currently the company maintains a relatively healthy balance sheet for a film studio, has significantly increased its revenue through strategic acquisitions, and has various upcoming releases with enormous upside potential. In the coming months Lions Gate is set to release Ender's Game (November 1st), The Hunger Games: Catching Fire (November 22nd) and Divergent (2014). There are a few important factors to consider in these three upcoming releases. Firstly, The Hunger Games: Catching Fire is a sequel to the 14th highest grossing film in cinema history. The first Hunger Games generated a total of $691,247,768 worldwide and had a budget of less than 78 million. In examining its success and cross referencing the average success of sequels of films with high box office revenue and franchise films such as Twilight we can assume that Hunger Games: Catching Fire, will have no problem making the same and or more in box office revenue come November. However this may not necessarily be the case.
Scott Mendelson from Forbes magazine argues that sequels to films with large and or record-breaking box office revenue streams more often than not tend to have sequels with little to no growth in comparison. The logic behind this argument bases itself on the notion that historically big franchise films, which have extremely high initial revenue, have no room for growth come the release of their sequels. In the past this has consistently been the case with a variety of franchises such as the Star Wars films, The Godfather Series, the Indiana Jones trilogy etc. That being said though the Hunger Games sequel could turn out to generate over a billion worldwide (as many are currently predicting), it would be unwise to expect this as an incontrovertible truth. The bottom line of this argument is that the more profitable a film is at first the less potential and or room there is for growth relative to its sequel. In layman's terms, The Hunger Games series may have already hit a significant profit ceiling.
The two other films Lions Gate is releasing, Ender's Game and Divergent are both relatively risky ventures, which, similarly to the Twilight and Hunger Games trilogies are film adaptations of successful book franchises as well. What Lions Gate is currently attempting to do is establish a formula for generating massive box office revenues in the same way that Marvel and Pixar have done. The problem with doing this is that it is never a guaranteed or sustainable profit strategy. Just this weekend Sony Picture's new film The Mortal Instruments: City of Bones (based on a teenage book franchise) only generated 9.3 million dollars in the U.S. and Canadian markets. Sony's new flop is among a slew of other teen-oriented film releases, which have consistently bombed in the last 12 months. This may not bode well for Lions Gate's next teen-franchise film, "Divergent," which is slated for release in 2014.
The greater problem that Lions Gate will have to face in coming years is the massive decrease in film attendance, which has grown exponentially in recent years. In 2012 film attendance dropped to its 25-year-low, with young consumers-those who often view the most films-down more than 40% since 2002.
AMERICA'S DWINDLING BOX OFFICE NUMBER - includes U.S. and Canada
2010 1.33 billion 1998 1.43 billion
2009 1.41billion 1997 1.35 billion
2008 1.34 billion 1996 1.31 billion
2007 1.40 billion 1995 1.21 billion
2006 1.40 billion 1994 1.24 billion
2005 1.37 billion 1993 1.18 billion
2004 1.48 billion 1992 1.09 billion
2003 1.52 billion 1991 1.14 billion
2002 1.57 billion 1990 1.19 billion
2001 1.43 billion 1989 1.26 billion
2000 1.38 billion 1988 1.08 billion
1999 1.44 billion 1987 1.09 billion
The reasons for this collapse in movie theatre attendance varies from the high ticket costs, (which have increased more than 90% since 1995), the availability of online media at no cost, and overall lack of the so-called "film experience." Taking all of this into account should make anyone holding positions in stocks correlated to film production and distribution weary. Lions Gate is currently trading at $35.51 a share (over 120% increase from their share value 12 months ago) and has just recently surpassed its 52-week high. The only way Lions Gate can sustain this share price is if its next film releases prove to be box office hits and in addition film attendances begin to rise significantly in coming months. As of right now investors should be cautious of these two factors in the months ahead and perhaps take profits until the release of "Hunger Games: Catching Fire."
Lions Gate was just recently downgraded from outperform to neutral by Zacks and out of a total of 12 analysts polled 10 have it set at a "buy" 1 expects it to "outperform" and 1 has it at a "hold."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.