Lions Gate Entertainment Corp's Obsession Has to Stop!

Source: Lions Gate. 

The past few years have been pretty good for Lions Gate Entertainment (NYSE: LGF  ) . Between 2009 and 2013, the multi-media company saw its revenue climb 77% from $1.5 billion to $2.6 billion, as box office hits like The Twilight saga and The Hunger Games trilogy have been a boon for business. And while the company appears to be on the rise, there's one thing standing in its way that rival Walt Disney  (NYSE: DIS  ) understands all too well -- small doesn't cut it.

Lions Gate's emphasis on small movies has to stop
In its 2014 fiscal year, Lions Gate released 13 theatrical motion pictures. While every studio hopes each movie will be a winner, some films just don't sell. During the year, five of its films bombed in the sense that their box office receipts came in under their estimated budget. Another two movies saw their box office receipts come in slightly higher than their budgeted cost, but it's unlikely that they made the company any money because of the cut taken by theaters.

Movie Budget Gross Box Office Gross/Budget
Hunger Games: Catching Fire $130 million $857.7 million 6.60
Now You See Me $75 million $351.7 million 4.69
Divergent $85 million $266.9 million 3.14
Tyler Perry's A Madea Christmas $25 million $52.5 million 2.10
Red 2 $84 million $137.2 million 1.63
Escape Plan $70 million $103.8 million 1.48
I, Frankenstein $65 million $71.5 million 1.10
The Big Wedding $32.5 million $35.8 million 1.10
Legend of Hercules $70 million $61.4 million 0.88
Ender's Game $110 million $89.7 million 0.82
Tyler Perry Presents Peeples $15 million $9.2 million 0.61
Single Moms Club N/A $16.3 million N/A
You're Next N/A $18.5 million N/A

Source: the-numbers.com.

As you can see, Lions Gate's movies tend to vary significantly in terms of costs. The cheapest film (with the exception of You're Next and Single Moms Club, which have no estimated budgets publicly available) was Tyler Perry Presents Peeples at $15 million. The most expensive was The Hunger Games: Catching Fire at $130 million.

While it's nice for the company to experiment a bit with different types of movies, most of its films with a budget of $70 million or less performed poorly. As a result, management booked a $42.4 million impairment charge for the year (which also included its television programs), up from $31.3 million a year earlier. The only exceptions to the $70 million rule were Tyler Perry's A Madea Christmas, which had a budget of $25 million and brought in $52.5 million in the box office, and Escape Plan, which cost $70 million and brought in $103.8 million.

Source: Lions Gate

Lions Gate's trend is that bigger is, in fact, better. Excluding the two films where data hasn't been reported, and taking the ratio of gross box office revenue over estimated budget, we can see that four of the studio's five most successful films exceeded the $70 million threshold. This suggests that while Lions Gate has a pretty good record with higher budget films, its lower budget movies are proving to be a drain on business.

What does Disney do better?
Unlike Lions Gate, Disney does not show any relationship between the cost of a movie and how well it performs in the box office. In its most recent annual report, the company showed that it had released five animated films during the year and four live action movies. Of the eight movies shown below, only three were at or below the $70 million level and each performed well. In fact, the only film that did poorly was The Lone Ranger, which cost $275 million to make and raked in just $260 million in the box office.

Movie Budget Gross Box Office Gross/Budget
Iron Man 3 $200 million $1.2 billion 6.00
Planes $50 million $219.8 million 4.40
Lincoln $65 million $273 million 4.20
Monsters University $200 million $743.6 million 3.72
Wreck-It-Ralph $165 million $473.4 million 2.87
Oz The Great and Powerful $200 million $489.6 million 2.45
Frankenweenie $39 million $81.2 million 2.08
The Lone Ranger $275 million $260 million 0.95

Source: the-numbers.com.

These findings point to Disney's strength in producing successful films even on a small budget, which implies that the entertainment giant possesses some non-monetary advantage that Lions Gate has not recreated. Because of this unknown difference, the average ratio of box office revenue over budgeted cost has come in higher at 3.33 compared to Lions Gate's 2.2.

Foolish takeaway
Using movie data from both production studios, it's interesting to see how they've performed. While Disney seems to have success no matter what, Lions Gate's success stories mostly come in the form of its more costly ones.

Because of this disparity, it makes sense for Lions Gate to identify why it's coming up short. But a better approach might be to reduce its production of these films and to focus on bigger ticket projects. This would likely decrease the quantity of movies the company releases in a given year and could expose it to greater risk if one of them flops.

Still, if it can continue to turn out cash cows like The Hunger Games: Catching Fire and Now You See Me, the risk might be worth the reward.

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  • Report this Comment On June 25, 2014, at 12:37 PM, SimpleWorks wrote:

    Interesting analysis but only 2/3 complete. The third leg of the stool in the movie business is VOD/BluRay/DVD which is a high margin piece and missing in your data.

    A few additional points:

    1) Lionsgate does a better job than anyone at hedging their bets often teaming up to reduce their cost/risk exposure. IMO it's done out of necessity due to their size and I appreciate their fiscal responsibility when it comes to reducing their risk on unproven new projects. Case in point: "Gods of Egypt" has a 140M production budget but after incentives to film in Australia, licensing agreements, etc. Lionsgate's exposure is a mere 10M.

    2) Lionsgate/Summit often acquire distribution rights after production is complete and they don't always acquire global distribution rights, it could be US Box office only. Their cost for these distribution rights is rarely disclosed or I don't know where to look. If you listen to their conference calls you'll hear them say "we" expect the property to be profitable "for us". I think they're pretty savvy on the cost side.

    3) Disney does an incredible job marketing their films but they don't spare any expense. And at 145B market cap size company they don't have to. My point is when you add in the marketing cost i.e. DIS spent 100M marketing Iron Man 3, it significantly changes your Gross/Budget ratio. I think you'll find LGF is much closer than you think on this ratio given their frugal marketing campaigns.

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