Lions Gate Entertainment's (LGF +0.00%) stock has seen volatile price swings over the past week. This has everything to do with expectations. In the short term, expectations drive stock prices north or south. If you eliminate the expectations game and look at underlying business performance, the companies that are driving their top lines while managing costs well are often going to be the long-term winners when it comes to stock appreciation. Avoiding debt also helps. Interest on debt can catch up to a company and limit growth potential.
Lions Gate Entertainment is leveraged, which is a negative, but it's growing fast enough that this might not be a concern down the road -- especially considering the recent performance of The Hunger Games: Catching Fire and the potential for its two future installments: The Hunger Games: Mockingjay Part I and The Hunger Games: Mockingjay Part II, which are due out in 2014 and 2015, respectively.
The Hunger Games: Catching Fire impressed over the holiday weekend, beating out Walt Disney's (DIS 1.01%) Frozen, and Paramount Pictures' Thor: The Dark World. Paramount Pictures is owned by Viacom (VIAB +0.00%). While Lions Gate Entertainment was the big winner over the weekend, all three companies should be classified as winners. Let's take a look at why.
Catching fire on Thanksgiving
While much of the media attention is placed on retailers for the Thanksgiving holiday weekend, the biggest winners this year can be found at the box office.
For the Wednesday-Sunday period, The Hunger Games: Catching Fire did $110.2 million at the box office. This far surpassed the previous $82 million record held by Harry Potter and the Sorcerer's Stone, set 12 years ago. However, adjusted for inflation, Harry Potter and the Sorcerer's Stone would have done $117 million, and Toy Story 2 would be the big winner at $127 million.
Disney's Frozen did $93.3 million for the Wednesday-Sunday time period. This is still an exceptional performance, and without The Hunger Games: Catching Fire in the arena, it would be the big news. However, keep in mind that while The Hunger Games: Catching Fire has already hit international audiences (48.3% of box office sales foreign), Frozen hasn't really hit that market yet (15.2% of box office sales foreign). Also consider that Disney should have a field day with merchandising. Disney has a knack for optimizing its revenue potential on successful movies.
Eliminating comparisons and looking at profitability, The Hunger Games: Catching Fire is an enormous winner for Lions Gate Entertainment...the movie's budget: $130 million; worldwide box office sales to date: $573 million.
You also must consider that this was only the second weekend. Imagine how high that ticket-sales number might go through the Christmas holiday season. Also consider that Lions Gate Entertainment has two more installments coming out over the next two years: The Hunger Games: Mockingjay Part I and The Hunger Games: Mockingjay Part II.
Frozen is also likely to be a big winner in regards to profitability...the movie's budget: $150 million; worldwide box office sales already: $110 million.
Thor: The Dark World has a budget of $170 million and worldwide box office sales of $591 million. Therefore, Viacom shouldn't be forgotten about, either.
Now let's take a look at audience responses for these three movies, which will likely indicate continued potential at the box office and for in-home sales.
Audience response
I wrote about The Hunger Games: Catching Fire twice over the past week, including audience responses from IMDb.com and RottenTomatoes.com. These audience responses were provided to indicate how the movie might perform. As usual, they proved to be accurate. Now, after more audience members saw the movie, let's see how those scores measure up to Frozen and Thor: The Dark World.
On IMDb.com, The Hunger Games: Catching Fire sports a score of 8.3 (of 10), slightly higher than Frozen at 8.2, and Thor: The Dark World at 7.6. Thor: The Dark World has a very respectable score, but The Hunger Games: Catching Fire and Frozen have phenomenal and rarely seen scores.
If you look at RottenTomatoes.com, you will see a similar pattern. An amazing 93% of audience members recommend The Hunger Games: Catching Fire. Frozen isn't far behind with 91% of audience members recommending the movie. A still-impressive 84% of audience members recommend Thor: The Dark World.
In other words, potential is still high for these movies going forward, especially for The Hunger Games: Catching Fire and Frozen.
Expectations
Lions Gate Entertainment offers the most upside potential. The one negative is that the company it leveraged with a debt-to-equity ratio of nearly 3.0, and it doesn't offer any yield. If you're looking for more safety without sacrificing growth potential, consider Disney, which sports a debt-to-equity ratio of 0.3 and currently yields 1.1.
