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This Lion Has Become a Polecat
02/16/2012 9:30 am EST
Sometimes certain stocks seem immune from the forces-like profit and loss, market share, and margins-that affect other stocks. You need to be very careful before thinking their unique qualities make them immune from gravity as well, writes Chad Fraser of Investing Daily.
Lions Gate Entertainment (LGF) released a disappointing earnings report last Thursday, but judging by the stock's performance since, you'd never know it.
In fact, if you hadn't heard the news, you might think that Lions Gate had released a major new blockbuster film instead: on Friday, the stock gained 7.5%, to $11.84. It has since pulled back to around $11.40...but that's still good for a 67% jump in the last four months.
(Lions Gate Entertainment last made headlines during its high-profile-and ultimately successful-fight to fend off a takeover attempt by billionaire investor Carl Icahn last year.)
Lack of New Films Drags Down Revenue
In its 2012 third quarter, which ended December 31, Lions Gate's revenue fell 23.6% to $323 million, from $422.9 million a year ago. The company's loss narrowed to $1.7 million, or a penny a share, from $6 million, or 4 cents a share.
Both revenue and earnings were far short of the Street's expectations of a 9 cents-a-share profit on $362 million of revenue.
"We had no wide theatrical releases in the quarter, but we received solid contributions from our other operating divisions and another strong performance by EPIX [the specialty TV channel the company runs in a joint venture with MGM and Viacom]," said Lions Gate Entertainment Chief Executive Officer Jon Feltheimer.
Feltheimer then put his finger squarely on the reason why investors so quickly shrugged off the weak quarter: they expect one of the company's latest acquisitions to pay off fast, likely by March.
He said: "We're very excited about the opportunities created by our recent acquisition of Summit Entertainment. The . March 23 theatrical release of The Hunger Games and the November 16 theatrical release of Twilight Saga: Breaking Dawn 2 lead a strong combined slate that we believe will enable us to deliver increased consistency, profitability, and value to our shareholders."
The Hunger Games Is a Potential Feast
The Hunger Games, in particular, has been generating huge buzz prior to its release. The film, based on the novel by Suzanne Collins, is set in a post-apocalyptic land located in what is now North America. The Hunger Games are an annual ritual where teenagers face off against one another in a battle to the death.
Michael Comeau of Minyanville.com built much of his bullish case on Lions Gate stock on the film's anticipated success. In doing so, he drew an interesting comparison between Lions Gate and Activision (ATVI), the maker of the blockbuster Guitar Hero video game:
"Right now, Lions Gate is resembling Activision in 2006, when the Guitar Hero boom first really caught its stride in the mass market. I distinctly remember going into Best Buy (BBY) stores every weekend, seeing crowds around Guitar Hero demo stations, and thinking 'This is the stupidest thing I've ever seen.'"
"Eventually, it dawned on me that somebody was making a boatload of money, and Activision turned out to be a huge home run as Guitar Hero regularly smashed Wall Street's sales estimates."
Zacks.com, meanwhile, takes a more tempered view, pointing out that Lions Gate operates in a competitive industry, and goes up against such heavyweights as Fox Entertainment Group (NWS), Paramount (VIA), and Time Warner (TWX), not to mention Walt Disney (DIS), which just reported an 18% increase in profits in its latest quarter.
But under the heading "What to Cheer?" Zacks points out that "the company's filmed entertainment backlog increased for the fifth consecutive quarter to $607.5 million, representing strong future revenues that are not yet recorded from the licensing of films and television products." The site is maintaining its long-term neutral recommendation on the stock.
So would it pay to try to cash in on The Hunger Games by purchasing Lions Gate stock? The sluggish results of the company's other divisions in the latest quarter (EPIX was one of a very few bright spots) and the sharp run-up in the share price-which indicates that much of Hunger Games' success could already be built in-suggest that the payoff could be much smaller than most investors think.
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