With the ‘Divergent’ Movie Franchise, Lions Gate Stock Looks Like a Winner

Will audiences continue to come out for Lions Gate Entertainment's (NYSE: LGF  ) Divergent movie adaptation despite poor reviews? Host Ellen Bowman puts this question to Fool analysts Nathan Alderman and Tim Beyers in this week's episode of 1-Up On Wall Street, The Motley Fool's web show in which we talk about the big-money names behind your favorite movies, toys, video games, comics, and more.

Theo James and Shailene Woodley star in Divergent. Credit: Lions Gate Entertainment.

Nathan says that there's already a built-in fan base for the series thanks to strong sales of author Veronica Roth's books. The first two novels -- Divergent and Insurgent -- had sold more than 2.6 million copies as of last year at this time. The third novel, Allegiant, is still third on Amazon.com's list of best sellers among teen science fiction and romance books. The Kindle e-book version ranks fourth overall among paid books, with Divergent and Insurgent taking the top two spots, respectively.

Tim notes that Divergent already boasts a rare 'A' CinemaScore, which should lead to positive buzz and a steady audience. Current tracking has the movie earning another $25 million at the U.S. box office over the weekend, putting its two-week total at about $94 million domestic. Foreign results are still largely unknown at this point.

What we do know, Tim says, is that investors have sold off shares of Lions Gate on expectations that Divergent movie franchise can't be what Twilight was or what The Hunger Games is. Maybe so, but Lions Gate has only had two strong, teen-driven franchises in theaters in the same year once before -- when The Hunger Games paired with Twilight: Breaking Dawn-Part 2. Spectacular results followed.

We'll see a similar pairing this November, when The Hunger Games: Mockingjay-Part 1 joins Divergent on this year's movie slate. Tim says the combination could create substantial upside for Lions Gate investors, especially if Divergent goes on to produce anywhere near what 2008's Twilight did.

Now it's your turn to weigh in. Have you seen the Divergent movie? Do you plan to? Please watch the video as Ellen puts Tim and Nathan on the spot, and be sure to check back here often for more 1-Up On Wall Street segments.

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  • Report this Comment On March 30, 2014, at 2:45 PM, Clint35 wrote:

    I haven't seen it but I think LGF is a great buy right now.

  • Report this Comment On April 01, 2014, at 10:19 AM, RealityCheck2014 wrote:

    Divergent box office revenue is tracking at 38% of the original Hunger Games in 2012 on a similar production budget. This means that operating income for Divergent is likely tracking at about 20-25% of The Hunger Games because the additional 62% of revenue that The Hunger Games generated all fell directly to the operating income line. Divergent is also unlikely to benefit much from any large international box office revenues because most of the foreign rights were sold to offset production expenses.

    At his pace, Divergent will only fill the income slot of the minor "Now You See Me" success in 2013. Mockingjay 1-2 should keep LGF earnings steady in 2014-2015 but Allegiant was suppose to fill the Hunger Games franchise earnings void in 2016. This is not going to happen and that means that LGF must find a major franchise success to fill the massive $200+ million annual operating income void that the Hunger Games franchise will leave in 2016.

    A review of the current LGF/Summit slate reveals ZERO high concept/tent pole possibilities to fill the Hunger Games franchise void in 2016 and beyond. This is a major problem because major tent pole films have two year lead times.

    LGF is trading at 118x its operating income from FYE 3/31/12 (Just 2 years ago!) Almost all of the additional market cap value since January 2012 is driven by The Hunger Games franchise that expires in 2015. LGF has no identifiable replacement for The Hunger Games.

    All of the above means that LGF has an earnings disaster waiting to happen in 2016 and beyond and that means the current 16x P/E ratio is fundamentally irrational. LGF is trading on very shallow analyst analysis and irrational hype rather than sound fundamentals. It is also benefiting from the overall market bubble effect that is driven by QE liquidity rather than fundamentals.

    A rational and objective analysis of LGF based on fundamentals reveals a highly overvalued stock.

  • Report this Comment On April 02, 2014, at 9:45 AM, TMFMileHigh wrote:

    @RealityCheck2014,

    Maybe. The key problem I see with your dire prediction is that Lions Gate has already defended against a flop with the way it sold the film:

    http://www.bloomberg.com/news/2014-03-21/lions-gate-revisits...

    Adding back $70 million in pre-sold int'l distribution rights cuts LGF's production out of pocket to just $15 mil. Pile on another $40 million for marketing and distribution -- which strikes me as pretty standard -- and you're left with the studio spending $55 mil to produce, market, and distribute the film worldwide, while also leaning on publisher HarperCollins to help spread the word.

    Now look where we are as of this writing: http://www.the-numbers.com/movie/Divergent#tab=box-office

    At $96 mil. domestic, "Divergent" is already within the estimated $110 mil. gross I'd guess for box office break-even. (Again, presuming that Bloomberg's figures are correct.) At $150 mil. -- entirely possible in my view -- Lions Gate would pocket a nice win ahead of merch, DVD, Blu-ray, and download sales, and have more bargaining power with theater operators and overseas territories heading into "Insurgent" and "Allegiant."

    That doesn't mean these films are up to the standard set by "The Hunger Games." My point is that they needn't be: Lions Gate's frugality has long proved an advantage in an industry defined by excess. I think that's true here as well, and it affirms my belief in the stock.

    FWIW and Foolish best,

    Tim

    --

    TMFMileHigh in CAPS and on the boards

    @milehighfool on Twitter

    http://about.me/timbeyers

    http://timbeyers.me

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