With the final “Twilight” movie opening this week, Lionsgate is primed to capitalize on its momentum with investors and take its place alongside Hollywood’s majors at long last.
Lionsgate shares soared 14% on Friday to close at $16.68 on the heels of a stellar quarterly earnings report that blew past analysts’ expectations mostly thanks to boffo homevid sales of “The Hunger Games.”
The stock has nearly doubled in value since January, when Lionsgate closed its acquisition of “Twilight” producer Summit Entertainment. The marriage of the “Hunger Games” and “Twilight” franchises, coupled with young adult-targeted prospects in the hopper and growing revenue from TV and digital markets, has Wall Streeters swooning over Lionsgate’s earnings potential in the coming years.
On Friday Alan Gould of Evercore raised his price target on the company’s shares from $18 to $20 and noted that “The Twilight Saga: Breaking Dawn — Part 2” is tracking well, with higher ticket pre-sales than for last year’s “Breaking Dawn — Part 1.”
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Gould said he likes the stock for several reasons: the franchises, predictable earnings growth with lower P&A costs, the de-leveraging of the balance sheet from $1.1 billion this year to $230 million by March 2015 and the possibility of a small dividend.
“It is misperceived as simply an independent film company, yet it controls two of the dominant franchises in Hollywood,” Gould added.
The four “Twilight” films have generated more than $2.5 billion in worldwide box office for Summit, and the fifth is expected to eclipse the worldwide cume of the fourth, which topped $700 million.
In dissecting Lionsgate’s fiscal second quarter earnings, James Marsh of Piper Jaffray noted that “Hunger Games” alone generated revenue of $166 million — far above his $114 million estimate for the homevid release. “Hunger Games” generated nearly $700 million at the worldwide B.O.
“The cash flow pig from ‘Hunger Games’ is moving through the python, and we expect this to become a recurring theme with at least one more ‘Twilight’ and three more ‘Hunger Games’ films,” he wrote in a research note.
Beyond the B.O. gains, Lionsgate CEO Jon Feltheimer emphasized that the company’s revenue base has expanded during the past five years as its TV biz has grown. It has high hopes for its most recent entries, FX comedy “Anger Management,” toplined by Charlie Sheen, and the sudsy ABC drama “Nashville,” which Disney chief Bob Iger singled out as having growth potential for the network during the Mouse’s earnings call last week.
Lionsgate is also seeing growing returns from its library of film and TV titles as digital revenue augments sales of physical DVD and Blu-ray discs. Its Epix pay TV joint venture with Paramount and MGM has been a driver of digital licensing coin, first with Netflix and now with Amazon and others.
“Just five years ago, 70% of our library revenues were generated by packaged media,” Feltheimer noted. “This year, our library revenue should be up approximately 20%, with only 38% generated by packaged media as digital becomes an increasingly important and high-margin component.”
Feltheimer and Co. are also generating goodwill on Wall Street for delivering on past promises. Feltheimer issued a particularly bullish forecast during its May conference call with analysts, predicting that the combo with Summit was on track to generate $900 million in EBITDA over the next three years. Doug Cruetz of Cowen, who has an outperform rating on the stock, noted in his report Friday that his EBIDTA estimate for the quarter had been $33 million — less than a third of the reported $109.7 million.
“We believe (Lionsgate) shares have at least 20% upside relative to the next 12 months,” he wrote.
As “Twilight” fans begin camping out in anticipation of Monday’s premiere at the Nokia and Friday’s opening, investors are impressed by Lionsgate’s strategy for opening the next three “Hunger Games” pics in the pre-Thanksgiving slot in 2013, 2014 and 2015. Lionsgate recently signed Francis Lawrence, director of the second installment, “Catching Fire,” to helm the final two movies, “Mockingjay Part 1” and “Mockingjay Part 2.”
“We’re obviously impressed with what he’s doing with the franchise,” Feltheimer said.
Lionsgate also has “Ender’s Game” — another potential young-adult franchise based on a fantasy novel, with Asa Butterfield (“Hugo”) starring — opening on Nov. 1, 2013, and it is developing a number of other potential multi-installment properties.
On the Friday call, Feltheimer singled out “Divergent,” based on the fantasy-book series by Veronica Roth, noting that Lionsgate had already signed Shailene Woodley to star, Neil Burger (“Limitless”) to direct and set it for release on March 21, 2014 — the same slot it used this year for “The Hunger Games.” Summit closed a deal in 2011 to acquire film rights to the series, with Red Wagon toppers Douglas Wick and Lucy Fisher producing along with Pouya Shahbazian.
“To remind everyone, the books have already sold more than 2 million copies and are tracking ahead of both the ‘Twilight’ and ‘Hunger Games’ books at a comparable stage in their growth trajectory,” Feltheimer said.
Patrick Wachsberger, co-chairman of the motion picture group and a longtime expert in foreign sales at Summit, told analysts that Lionsgate had done “extremely well” with “Divergent” during AFM, with international territory sales already covering 80% of the movie’s budget.
Lionsgate also recently closed a five-year, $800 million revolving credit facility and paid off the balance of its $500 million term loan to buy Summit two years ahead of schedule, which will save it millions in interest payments.
“With an $800 million facility, a record $1.2 billion backlog that represents a sizeable portion of our future stream, a 15,000 title library, a significant box office share and a successful and diversified TV slate, we have now achieved critical mass and leveled the competitive playing field,” Feltheimer said.