The young adult franchise about teenagers who must compete to the death in order to survive has generated more than $1.5 billion at the worldwide box office, and has helped the studio’s share price more than double in the past two years. But managing Wall Street’s expectations can be a gladiatorial sport in and of itself.
Lionsgate learned that painful lesson last year when its stock tumbled more than 10% the Monday after the opening of “The Hunger Games: Catching Fire,” which failed to meet its most bullish projections. With the latest film in the series, “Mockingjay — Part 1,” set to debut Nov. 21, the studio has to hope that box office prognosticators don’t get carried away.
But that’s easier said than done. Wall Street is banking that the upcoming installment will be one of the year’s biggest hits. Analysts forecast that “Mockingjay — Part 1” will take in between $925 million and $1 billion worldwide, a 7% to 16% bump from the previous film’s $865 million gross.
“My guess is that it will be higher than ‘Catching Fire,’ given the increased awareness of the brand overseas,” says Standard and Poor’s Tuna Amobi.
Matthew Harrigan of Wunderlich Securities agrees that the international side represents the growth area, but admits that there could be a repeat of last year’s decline in the stock price after “Catching Fire” opened.
“I think that the Street is now much more cognizant of the earnings power in Lionsgate’s TV business, which helps the stock, but I still think that anything much below $1 billion would not be a positive,” he suggests.
Marla Backer, an analyst with Ascendiant Capital Markets, likes to take a longer view, maintaining that too much emphasis is placed on a film’s start rather than its entire life cycle. “Unfortunately, when you’re talking about numbers that big, an opening does (impact the stock),” Backer says. “It’s too bad, because I say over and over, it’s not what a movie does in its first weekend. It’s what the movie does overall.”
Lionsgate’s situation is rare among entertainment companies. With the possible exception of DreamWorks Animation, most publicly traded companies in the movie business are so heavily diversified that the success or failure of a film’s initial weekend barely registers in their share price. Both Lionsgate and DWA, to help prevent their stock from suffering huge fluctuations with every debut, have broadened their revenue streams. Lionsgate fields a range of television properties such as “Orange Is the New Black” and “Mad Men” while DWA has moved more heavily into merchandising and smallscreen entertainment.
However, their share price vacillations demonstrate the difficulty that smaller players face in meeting the demands of investors and analysts when they don’t have theme parks and cable networks to cushion the bottom line on a quarterly basis. For companies like MGM and Relativity Media that have weighed going public, the examples of “The Hunger Games” and the stock woes DWA suffered when “How to Train Your Dragon 2” stumbled out of the gate last summer sound cautionary notes.
“For mini-majors, when a movie does well or does poorly, the impact is much more amplified,” says Steven Azarbad, an investor in MGM and chief investment officer of Maglan Capital. “The expectations for each film are high, so you have to exceed expectations in order for the stock to do better.”
With major studios, there are few instances when a film’s performance — even its opening-weekend results — materially impacts share price. However, next year’s “Star Wars” sequel could alter the Walt Disney Company’s share value given that it kicks off years of spinoffs, toy lines and theme park rides.
“That’s going to move the needle and attract interest, because ‘Star Wars’ is set up to be the next big event,” says media analyst Hal Vogel.
Likewise, 21st Century Fox and Time Warner could see their stock rise or fall based on the performances of “Avatar 2” or “Batman v Superman: Dawn of Justice,” respectively, given that they serve as expensive launching pads for their next major franchises. Yet this is still an era when a flop like “John Carter” can result in a $200 million write-down without making a dent in Disney’s share price. At a time when TV production can easily generate half of a media giant’s revenue and as much as 80% of its operating income, a movie’s opening is less important to its financial health than a carriage deal or a Netflix pact.
“Film divisions have negligible or minimal impact, and it’s been diminishing over the years, because film business margins are sideways and haven’t improved,” Vogel says. “If a film does $60 million instead of $80 million at Disney, it’s not going to matter. ESPN or the theme parks are more dominant.”
Lionsgate’s focus on franchises, output deals and foreign pre-sales to finance its films shows it’s reducing the risks associated with making movies.
“That’s a good thing for Lionsgate stock,” says James Marsh, an analyst with Piper Jaffray. “Volatility is bad for investors. People pay a premium for less volatility.”