|  | | Price | 5.610 | | | Change | -0.190 | |
Research Wizard
Add to MSN Stock List
Message Board
'Best in Business'
A series of columns by Michael Brush has earned a Best in Business award from the Society of American Business Editors and Writers.
Read about the columns and the award here.
Related Sites
Lions Gate Films
CinemaNow
Company Focus
Recent articles:
• Thrills, chills, profits at 180 mph, 6/2/2004
• 4 techs insiders are buying, 5/26/2004
• The next big thing in Web access: Power lines, 5/19/2004
More...
| | Company Focus
Wanna be in pictures? Try Lions Gate
Quirky, arty, gory studio leaves the blockbusters to Hollywood and turns a reliable profit on virtually every 'small' movie it makes. And its stock is cheap.
By Michael Brush
When political junkies check out "Fahrenheit 9/11" -- a stinging send-up of the George W. Bush administration by Michael Moore that opens June 25 -- few are likely to catch the name of the tiny film company that helped make it possible.
But any Hollywood connoisseurs in the crowd will spot the name Lions Gate (LGF, news, msgs) in the credits as the distributor and know it makes perfect sense. They know that playing a key role in this Cannes Film Festival award-winner, a movie that the major studios wouldn't touch because it's so controversial, is just part of Lions Gates game plan.
This film company, after all, specializes in movies that are either too touchy or too gory or mainly just too small for mainstream Hollywood studios to handle. Lions Gate has brought out other sensitive films such as Dogma, a satirical critique of the Catholic Church with Ben Affleck, Chris Rock and George Carlin, and Rob Zombies House of 1000 Corpses -- both considered too controversial or too bloody to be distributed by the major studios that originally funded them.
But what more often sets a Lions Gate film apart are the numbers involved when it comes to financing and ticket sales. The typical budget and box-office take on a Lions Gate film can run anywhere from $10 million to $25 million. Thats peanuts compared with the numbers behind your average Hollywood blockbuster, which can easily run five or six times that much. In short, Lions Gate has found a profitable niche for itself somewhere between major studios like Walt Disney (DIS, news, msgs) -- which balked at handling "Fahrenheit 9/11" -- and the small, independent movie houses on shoestring budgets.
But the focus on this niche is only one reason of several that makes Lions Gates stock intriguing. The company, based in Santa Monica, Calif., and Vancouver, B.C., has fashioned a conservative approach to financing movies that all but guarantees decent profits on most projects. Meanwhile, it generates a steady stream of revenue from its own film library, which ranks as one of the world's largest. For these reasons and more, Lions Gate shares should move up nicely from recent levels of around $6.40.
Natexis Bleichroeder analyst Robert Routh, who has recommended Lions Gate to his clients since it traded under $2 over a year ago, thinks the stock could advance by around 75% to approach $11.25 over the next 12 months. Well get to the reasoning behind this price target in a moment. First, some of the basics on this movie studio and distribution company.
Attracts big names
Although Lions Gate releases relatively small films, dont write it off as a movie company for the unknown, up-and-coming artiste. Big Hollywood stars, from Robert De Niro and Dustin Hoffman to Halle Berry, Billy Bob Thornton, Greg Kinnear and Val Kilmer have appeared in Lions Gate films. A-list directors like James Foley and Nick Hamm are on the sets.
How does Lions Gate get the big names to sign on? Two reasons:- Most welcome the chance to do films that often win a high level of critical acclaim. It has got to get a little tiresome for these actors to be doing the sequel to the sequel, says Michael Burns, Lions Gates vice chairman.
- The company gives the stars a decent cut of the take. That way, they can make fairly good money from a Lions Gate film. And it doesnt hurt that Lions Gate production schedules are compact enough to be easy on a stars schedule.
To be sure, Lions Gate has many smaller, artsy films like The Red Violin in its repertoire. But its also had a hand in fairly big hits like Monsters Ball with Thornton and Berry ( who won an Oscar for her performance); The Punisher, starring John Travolta and based on a Marvel comic strip; and Dogma. Each film grossed more than $30 million at the box office.
Aside from Fahrenheit 9/11, this years slate promises several potential box-office winners. Top on the list is Open Water, a thriller about two divers who face shark attacks after getting left behind by their dive boat. (The intensity and rough cinematography of this film brings to mind the Blair Witch Project and has insiders calling the movie the Blair Fish Project.) Lions Gate thinks Open Waters will do some $20 million at the box office.
Other possible hits due out this year include The Cookout, an urban comedy with Queen Latifah; Beyond the Sea, a film about the 1950s crooner Bobby Darren starring Kevin Spacey; and Stage Beauty, an award winner at the Tribeca Film Festival. They are moving into an exciting time, says Tom Bishop, editor of the top-ranked stock newsletter BI Research, which has recommended Lions Gate to its readers. In general, the slate is bigger and better.
Lions Gate believes hit films like these, plus revenue from its library unit and other divisions, will help it bring in $650 million in revenue during its 2005 fiscal year, which started April 1. That should translate into $80 million in free cash flow -- which would make Lions Gate look cheap at $6.40 per share. At these levels, Lions Gate trades for just 11.6 times cash flow, while Metro-Goldwyn-Mayer (MGM, news, msgs), a midsize film company with a solid library, trades for 22 times cash flow. Companies like Lions Gate often report losses and are usually valued on the basis of cash flow or earnings before interest, taxes depreciation and amortization -- EBITDA.
True, Lions Gate is much smaller, so it probably wont reach MGMs valuation. But Routh thinks Lions Gate will get at least part of the way there, as its 2004 film slate unfolds and the bidding for MGM by the likes of Sony (SNE, news, msgs) heats up. (Sony initiated acquisition talks with MGM in late April.) Routh puts Lions Gate's fair value at 17.5 times free cash flow, which would push its stock toward $11.25 per share as the company moves closer to its goal of producing $80 million in free cash flow this year.
The Lions Gate script
Now, heres a closer look at some of the factors that might help Lions Gate shares move beyond $11 in the next year.
Above all, its a fairly safe bet Lions Gate will get a steady stream of profits -- and avoid big losses -- from films it produces and distributes. The reason: Lions Gate takes two steps to limit financial risks.
The company keeps strict tabs on budgets. The average marketing and production cost in Hollywood is $104 million, says Burns. In contrast, a Lions Gate budget will run anywhere from $5 million to $30 million. So we are not getting caught up in the typical studio mentality, says Burns. Next, the company pre-sells international rights to cover at least 65% to 90% of a films cost.
Traditional film companies are so big-hit driven, they are always swinging for the fences. Lions Gate is the complete opposite of that, says John Thornton, equity analyst at Aim Small Cap Growth fund (GTSAX), which holds Lions Gate shares. That explains why Lions Gate has made money on 28 of its last 29 movies. The company releases around 18 to 20 movies a year. It buys around 12 of those, and it makes six to eight on its own.
In its television unit, which has produced hits like Dead Zone on USA Network, Lions Gate takes a similar approach to reducing risk by working out co-financing with advertisers.
Its turned its film library into a cash cow. Lions Gate has been quietly snapping up film libraries over the years. Now it has one of its own with over 9,000 titles. This provides a steady, underlying stream of cash that's expected to hit $200 million this year.
There are a couple of trends that make this kind of film library more profitable than you might think. First, now that DVD players sell for under $40, consumers are building up their DVD libraries, Routh says. A Lions Gate title like Dirty Dancing, for example, sells 100,000 copies a month. It doesnt hurt that large retailers like Best Buy (BBY, news, msgs) use deep-discounted DVDs to bring in customers. Despite this discounting, Lions Gate makes healthy profits on each DVD. It produces them for around $3 each and sells them to retailers for about $9.99, Routh says.
Some other kickers
In late May, Lions Gate struck a deal to distribute movies based on more Marvel comic strips, like Iron Fist and Black Widow. The company already had dibs on The Punisher because it had picked up that Marvel comic strip when it bought Artisan Entertainment and its film library late last year. It may also strike similar deals with video-game companies to make movies based on their content, Burns says.
The company could also start seeing solid profit growth from Internet-based movie delivery as more people sign up for broadband Internet access. Lions Gate has a majority stake in CinemaNow, a Web site that delivers movies via the Internet. Other investors in CinemaNow include Microsoft (MSFT, news, msgs), the parent of MSN Money, and Blockbuster (BBI, news, msgs).
Finally, with the NBC Universal unit of General Electric (GE, news, msgs) mulling a bid for MGM if MGM doesnt work out a deal with Sony, Lions Gate shares might soon get a boost as a possible takeover candidate, Routh says. After all, its big library and its niche in the film industry could make a good fit with several major studios.
I wouldnt own the stock for that reason (alone), says Aim Small Cap Growth funds Thornton.
But then again, you don't have to.
|
