Very nice story on LGF....SOPHISTICATED INVESTOR
Putting stock in the box office
Lions Gate set to roar after 'Monster's Ball'
By Thomas Kostigen, CBS.MarketWatch.com
Last Update: 12:03 AM ET April 2, 2002
LOS ANGELES (CBS.MW) -- Winning an Oscar may mean more than plaudits for Lions Gate Films.
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The publicly traded film company (LGF: news, chart, profile) could see its share price rise as "Monster's Ball" - which it produced and landed Halle Berry the Academy Award for best actress -- reaps more theatrical revenue, and generates higher video and DVD rentals.
The award also puts Lions Gate in a better position to attract high-profile projects and talent, which could lead to further prosperity, experts said.
A single-hit film wouldn't have as much relative impact at the larger film studios, such as Disney (DIS: news, chart, profile), Vivendi Universal (V: news, chart, profile), Fox (FOX: news, chart, profile) or Sony (SNE: news, chart, profile). These conglomerates - which also put out Oscar-nominated and winning films - are diversified across numerous product and service lines.
Vivendi's businesses include environmental services and telecommunications. Disney, of course, has its theme parks and media networks. Sony has consumer electronics and games. News Corp, which owns Fox, has publishing and satellite networks.
A film such as "Monster's Ball," which is expected to earn about $25 million, would be almost inconsequential to those corporations' bottom lines.
But for Lions Gate, with just 43 million shares outstanding, a box office victory directly translates into stock market success. It also presents investors with a buying opportunity.
'A big positive'
Since the Oscar buzz began in mid-March, Lions Gate shares have risen more than 10 percent. Some revenue from "Monster's Ball" will appear in Lions Gate year-end earnings through March 31. The rest will have to wait until the 2002 first-quarter earnings release in August.
"'Monster's Ball' is a big success; per share, this is significant," says David Brenner, media and entertainment analyst at Arnhold and Bleichroeder in New York. "The film will definitely show up as a big positive, whereas it would be lost on a Vivendi or an AOL."
Other film companies first have to deal with merger dilution issues in their earnings. AOL Time Warner is taking the largest charge-off in corporate history - $54 billion - because of asset declines and charge-offs related to the merger of the giant Internet company with diversified entertainment conglomerate. Nevertheless, its film division, Warner Bros., suffers under the umbrella. AOL TimeWarner's stock price is off 50 percent since last year.
Just weeks ago, Vivendi took the largest write-off in France's corporate history - $13 billion due to its own merger-related issues. Vivendi acquired Universal Studios, Canal Plus, and most recently USA Films in complicated financial transactions.
And News Corp. may take the largest write down in Australian financial history -- more than $2 billion due to its investment in Gemstar-TV Guide, according to Deutsche Bank.
All this is to say that big film companies have a great deal more to worry about than making films.
Meanwhile, Dreamworks and Artisan, along with the plethora of independent production companies that focus solely on making movies, aren't publicly traded.
Boosting share prices
MGM is perhaps the only other film company besides Lions Gate whose products and service lines directly translate into share price.
Earlier this month, MGM's stock tanked more than 10 percent when it said it racked up bigger-than-expected losses and would be issuing more stock to repay debt. Its "Hart's War," starring Bruce Willis, and the remake of "RollerBall," didn't perform well at the box office. The film company didn't have any Oscar-nominated movies this year.
Lions Gate, of course, could suffer a similar fate. "The negative is that their content isn't well-received at the box office," Brenner says.
But so far, Lions Gate's formula is working.
"They are making films in the five to $15 million range, so they're not going to have a huge, blockbuster film," says Brenner. "But as long as they can produce one or two hits a year, they can make their feature film business cash-flow positive."
Lions Gate produces 10 to 15 films a year. A Canadian company with offices in Los Angeles, it also produces television, animated features, and rents studio facilities in Vancouver.
Still, "we're a filmed entertainment pure play," says Lions Gate Chief Executive Officer Jon Feltheimer.
That means Lions Gate rides the tide of content success.
Take "Monster's Ball," for example. The film cost about $4 million to make, plus the studio spent between $7 million and $9 million on publicity and advertising.
But, Lions Gate says it pre-sold its foreign rights to sales distribution territories for about $4 million. So, the company was only out of pocket about $8 million.
"Our business plan calls for hitting singles and doubles. If 'Monster's Ball' hadn't worked, we weren't going to lose a lot of money," says Michael Burns, vice chairman at Lions Gate.
Burns, a former investment banker at Prudential Securities, may have a keen business model, but he also understands how financial prowess can equate to creative success.
"It's a simple strategy," Burns says. "If we can prove our success and put together an Oscar campaign that works, we get control of better scripts. If we get better material, we get better directors, and can get good casts of talent."
Proof positive is Dustin Hoffman last week signing to star in an upcoming Lions Gate feature, "Confidence," also featuring Edward Burns.
Seeing stars
Smart investors look for opportunities in odd places. And Hollywood is one weird town. Lions Gate seems to be handily making its way through the jungle. But it still has to watch its step.
"They have to keep costs down," Brenner says.
But so far, so good. Lions Gate's future releases are staying to modest budgets - all under $15 million, according to Burns - and include "Confidence," "Rules of Attraction," and "Frailty," starring Matthew McConaughey.
The average big film studio movie costs $78.71 million, according to The Motion Picture Association of America.
The first-released feature on the Lions Gate slate will probably be the Oscar-winner Roger Avary's "Rules of Attraction."
Investors should heed those rules when it comes to investing in entertainment companies and look for the diamond in the ruff. Or in this case, the Lion in the jungle.
Sooner or later this may be a 2-3 bagger...but it will take some time....tuna |
