Regardless of the thoughts of efficient market advocates, it's difficult to argue that the stock market is always efficient. Sometimes Mr. Market has a little hiccup that causes a company's shares to rise or fall unjustifiably. This might have been the case on Monday when shares of Lions Gate Entertainment (NYSE:LGF-A) fell more than 10%. We'll find out as we analyze it and industry peers, Walt Disney (NYSE:DIS) and DreamWorks Animation (NYSE:DWA) below.
Why shares fell
When shares of a company fall precipitously, the culprit is usually a lawsuit, fraud, or a worse-than-expected earnings release. For Lions Gate, the news had nothing to do with any of these factors. Rather, it had to do with record-breaking results at the box office.
In its most recent debut of the film adaptation of the "Hunger Games" trilogy, The Hunger Games: Catching Fire, the company reported box office receipts totaling $158 million for the weekend. This result outpaced the $153 million earned from the first film in the trilogy, but fell short of the $175 million that was expected. By no means should investors be ashamed of the shortfall, however, as it still came out as being the sixth highest-grossing opening weekend of all time and fell just shy of the $160 million touted by The Dark Knight Rises.
To put everything in perspective, the total market value of Lions Gate fell by $474.4 million on news of a $17 million shortfall in box office receipts. It is true that the shortfall may be a precursor of worse things to come, but the film continued to deliver even after its opening weekend. Sales topped more than $307 million globally in the first week alone, far higher than the $130 million it cost to produce the film.
Could the decline really mean something else?
For years, Lions Gate has been somewhat of a disappointment for shareholders. From 2009 through 2012, revenue rose by only 8.3% from $1.47 billion to $1.59 billion. In contrast, DreamWorks Animation (NASDAQ:DWA) saw its revenue jump 15.3% over roughly the same timeframe. Lions Gate isn't alone in its plight, however; from 2009 through 2012, Disney (NYSE:DIS) experienced a 2.6% decline in revenue in its Studio Entertainment segment.
In addition to lackluster revenue growth, the company booked a net loss on an annual basis. This caused Mr. Market to significantly discount the company's shares. While the company's aggregate operating income for the four years between 2009 and 2012 came in at $4.7 million, DreamWorks saw its income come in at $641.8 million. Disney, not to be outdone, chalked up aggregate operating income of $2.21 billion.
Though the picture for Lions Gate looked to be going dark, it surprised investors in 2013 with revenue of $2.71 billion; this was a 70.6% increase from the year before. According to the company's annual report, the primary drivers behind the jump in revenue were two films, The Hunger Games and, to a larger extent, The Twilight Saga: Breaking Dawn – Part 2. Because of the success of these films, the company's operating income rose 715.2% from $33.5 million the year before to $273.1 million.
In juxtaposition, DreamWorks saw its operating income fall from $109.9 million to -$65 million as costs soared. Likewise, Disney's Studio Entertainment segment saw its operating income fall by 8.4% from $722 million to $661 million. The fall was primarily due to a higher cost of revenue and selling, general, and administrative expenses.
Despite the company's shortfall, Lions Gate's release of the second installment of the "Hunger Games" trilogy is something that management and investors alike should be proud of. No, it did not break box office records. It still outperformed its prequel during its opening weekend, and it will likely continue to rake in some attractive revenue. From this perspective, I believe that the market was overreacting when it caused the company's shares to fall so much yesterday.
Instead, the Foolish investor should be mindful of the possibility that Mr. Market may be factoring in a long-term downturn in business. Right now, Lions Gate is on the precipice of jumping in league with the big boys like Disney and falling back into the hole that it worked so hard to dig itself out of. If the company cannot continue delivering blockbusters like the films of the "Hunger Games" trilogy and The Twilight Saga, there is no doubt that revenue will fall and operating income may revert back to operating loss. It is with this mind-set that I urge the Foolish investor to evaluate the company's opportunities and the potential for downside if management cannot capitalize on those opportunities before buying a stake in it. I leave you with one last piece of wisdom: "Happy Investing! And may the odds be ever in your favor!"
Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.