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Lionsgate Is Still Catching Fire

Lionsgate Entertainment (NYSE: LGF  ) owns the "Hunger Games" franchise. This fact alone gives Lionsgate future potential considering only two of its four installments have so far been released. There are several reasons to like Lionsgate going forward, but it's not the only filmed entertainment company to keep an eye on.

Staying hot
The Hunger Games: Catching Fire accumulated $424,098,843 in domestic box-office receipts, making it the tenth-highest grossing domestic movie release ever. It was also the first time that the first two installments of a movie franchise grossed north of $400 million at the domestic box office. That's impressive, but keep in mind that this doesn't account for inflation. What's more impressive is that Catching Fire did $863,996,459 at the worldwide box office.

Some people wondered if this momentum would continue for in-home entertainment. With a 91% approval rating on Rotten Tomatoes and a solid 7.9 (of 10) rating on IMDb, it was logical to assume that the movie would perform well at home.

For its first weekend on DVD and Blu-Ray in North America, Catching Fire sold 3.9 million copies. Blu-Ray sales were 35% higher than the original. Keep in mind that DVD and Blu-Ray sales aren't as popular as two years ago, when the original hit the home movie scene. Why? Because more people use digital now than in 2012. Blu-Ray sales also have higher margins than DVD. Therefore, this should help Lionsgate's margins, which is then likely to aid the bottom line. Catching Fire's digital sales were 40% higher than the original for its first available weekend. It was also the no. 1 on all major digital platforms.

Since Mockingjay – Part I and Mockingjay – Part 2 are set to be released over the next two years, Lionsgate has an opportunity to match, or perhaps even exceed, results delivered for the first two installments. Furthermore, the company is only trading at 19 earnings. Lionsgate has delivered top-line growth of 83.73% over the past five years. Usually when a company is growing at this rate, you must pay a premium. Fortunately, that's not the case here.

If Lionsgate's Catching Fire performed so well at home in its opening weekend based on box-office success, what does that mean for others?

More than one entertainment opportunity
The obvious winner is Walt Disney (NYSE: DIS  ) thanks to Frozen. If you think back to prior to the movie's release, the trailer didn't give away much at all, and it looked like an ordinary animated movie. However, this was all part of Disney's genius. Unlike most production companies that hype a movie up with its trailer – while also giving away half the movie – Disney opted to under-promise, which made it easier to over-deliver.

Frozen has an audience approval rating of 89% on Rotten Tomatoes and an 8.0 rating on IMDb. It did $393,272,301 at the domestic box office, which is solid yet not exceptional. On the other hand, it did more than $1 billion at the worldwide box office. Put simply, Frozen is a global success. The in-home demand should be enormous. Frozen's DVD/Blu-Ray release date: March 18.

Time Warner's (NYSE: TWX  ) Warner Bros. delivered its own hit with The Hobbit: The Desolation of Smaug, which has an audience approval rating of 85% on Rotten Tomatoes and an IMDb rating of 8.2. It did $257,397,516 at the domestic box office and $937,397,516 at the worldwide box office. The Hobbit: The Desolation of Smaug is set to be released on DVD and Blu-Ray on April 8.

Both Frozen and The Hobbit aren't done delivering potential hits. Disney hasn't announced a release date for a Frozen sequel yet, though. Due to the company's poor track record with sequels, it's going to take its time on this one. The Hobbit: There and Back Again will be released on December 17, 2014.

And let's not forget about Sony's (NYSE: SNE  ) Columbia Pictures, which delivered American Hustle. American Hustle only has an audience approval rating of 78% on Rotten Tomatoes and an IMDb rating of 7.5, but those who enjoy it tend to rave about it. This should lead to positive word of mouth and strong demand for in-home entertainment. At the box office, American Hustle did $148,383,165 domestically and $249,438,165 worldwide.

From an investment perspective
Disney, Time Warner, and Sony are all very diversified. This means that individual movie successes shouldn't play a major role on the top line. However, Disney might be an exception because it will have an opportunity to implement Frozen's success in its theme parks, not to mention the fact that Disney is an expert merchandiser.

If you're looking for the biggest top-line impact for a movie franchise's current and future success, then you might want to consider Lionsgate. Please do your own research prior to making any investment decisions. 

Will any of the above companies dominate your living room in the future? 
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2014, at 10:03 PM, RealityCheck2014 wrote:

    Only trading at 19 earnings??? "The Hunger Games" has done extremely well but:

    1) It is the only major franchise success in the 19 year history of LGF.

    2) The $3 billion increase in LGF's market cap over the last 2 years is almost entirely related to earnings on "The Hunger Games" franchise.

    3) There is no evidence in LGF's past that "The Hunger Games" level success can be replicated every year for the 17 years after it expires in 2016.

    4) To date, the financial success of "The Hunger Games" franchise is an extreme anomaly, not evidence of a consistently successful story development system.

    A 19x multiple on LGF is irrational until LGF demonstrates that it can consistently create major franchises. Even a significant "Divergent" success will not justify a 19x multiple in this business.

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Dan Moskowitz

Dan Moskowitz spends the majority of his time researching stocks. He believes that fundamentals, and logic pertaining to industry trends, win out over the long haul.

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