Lions Gate’s Recent Sell off an Extreme Overreaction

If you enjoy The Hunger Games movies, or books, then you're used to rooting for the underdog. The Hunger Games: Catching Fire should be far from an underdog, but based on recent results versus expectations, that's the role the movie is playing.

Many people felt that The Hunger Games: Catching Fire could bring in $175 million in its opening weekend domestically, which would have made it the best opening weekend performer of the year, ahead of Iron Man 3 ($174.1 million in its opening weekend domestically). The Hunger Games: Catching Fire "only" managed to generate $158 million in its opening weekend domestically.

This led to a ludicrous 10% sell-off for Lions Gate Entertainment (NYSE: LGF  ) . On the other hand, savvy investors will look at this as a phenomenal opportunity to add shares. Let's take a look at the various reasons why this is the case and see how it stacks up against peers, Walt Disney (NYSE: DIS  ) and Viacom (NASDAQ: VIAB  ) .

About to catch fire
Lions Gate might not enjoy the fruits of its labor tomorrow, next week, or next month, but there are many reasons why the company is likely to outperform the market; it has a lot to do with The Hunger Games franchise.

First, consider that while the opening weekend performance might have missed expectations, the movie still sold $158 million in tickets domestically, which is a better performance than the $152.2 million the original Hunger Games earned in its opening weekend. Therefore, the sequel has a head start in regards to momentum.

Second, consider that Catching Fire has received stronger ratings than the original from both critics and audience members alike. For instance, according to the popular movie review site RottenTomatoes.com, 84% of critics enjoyed the original whereas 89% of critics enjoyed the sequel.

The critics gave the original and average score of 7.2 out of 10, and they gave the sequel an average score of 7.6 out of 10. If that's not convincing enough, then consider the IMDb.com scores. The original sports a score of 7.2 out of 10, whereas the sequel currently maintains a score of 8.3 out of 10. 

This is very important. These overall strong ratings indicate that those who have seen the original but not the sequel are likely to do so based on positive feedback. Perhaps more important is the fact that those who never saw the original will now have an interest in investing time in the franchise. Not only will this lead to these people viewing the sequel, but the original as well. Both events benefit Lions Gate.

Let's not also forget that as the franchise continuously attracts more fans, the potential for The Hunger Games: Mockingjay Part I (due out November 2014) and The Hunger Games Mockingjay Part II (due out November 2015) increases dramatically. Once again, Lions Gate benefits.

Despite the press screaming about "missed expectations," Catching Fire had the best November opening ever, supplanting The Twilight Saga: New Moon. It was also the biggest non-3D-surcharge opening ever, displacing The Dark Knight Rises. Most importantly, Catching Fire is on pace to beat the original's box office total of $691.2 million worldwide.

Viacom and Disney
Viacom's (NASDAQ: VIAB  ) Paramount Pictures recently released Thor: Dark World, and the company hoped its all-mighty Thor could steal some audience members from Catching Fire. This is a good news/bad news situation.

The good news is that Dark World generated $167.9 million in its first three weeks domestically, and $550.2 million worldwide, far surpassing its $170 million budget by a wide margin. The bad news for Paramount Pictures is that Catching Fire managed to generate nearly as much domestic revenue in just three days. 

In "the business," a movie must generate 2.5 times more sales at the box office than its budget to be deemed a success. The original Hunger Games generated 8.8 times more in sales than its budget -- a monster success. Catching Fire's budget of $130 million is much higher than the original's $70 million budget, but it's still likely to be a huge success as it has already totaled $317 million worldwide.

Thor: Dark World has received positive reviews, but that hasn't been enough to help it compete with Catching Fire. On RottenTomatoes.com, 65% of critics approved of Thor: Dark World. Audience members have been more impressive, with 85% approving of the movie. Thor: Dark World also sports a solid 7.6 out of 10 rating on IMDb.com.

The real competition will come from Walt Disney's (NYSE: DIS  ) Frozen. Despite being different types of movies, Frozen is designed to attract all audiences. Disney sometimes releases movies on one screen prior to making them available to the masses. That's the case here, with the movie already having been shown at the El Capitan Theater in Hollywood, Calif.

The feedback has been overwhelmingly positive, with 88% of 50 critics on RottenTomatoes.com enjoying the movie, giving it an average rating of 7.8 out of 10. A whopping 97% of critics on RottenTomatoes want to see Frozen. Therefore, demand will be high. On IMDb.com, Frozen has a score of 7.1 out of 10. 

Disney's Frozen will certainly steal some eyes from Catching Fire, but it's not likely to have a long-term effect on the potential of The Hunger Games franchise. Put simply, Lions Gate hit a home run with The Hunger Games, and it's always wise to invest with companies that sell products or services that are in high demand. 

The bottom line
Lions Gate's recent sell-off should be looked at as nothing more than a complete overreaction. The Hunger Games franchise gives the company tremendous potential to drive the top line going forward. Disney's Frozen should steal some box-office share in the near term, but any sell-off in Lions Gate shares related to short-term news should be looked at as a potential buying opportunity. 

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  • Report this Comment On November 29, 2013, at 9:06 PM, Sammy424242 wrote:

    Really? Paramount released Thor 2?

    Please, please do your homework before writing an article. It takes away from everything else you say. No credibility after that.

    Yes, they released Thor 1. But not Thor 2. I would tell you why, but you'll need to do some homework on that. In fact, it might do you good to do so for a change.

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