MGM Shares Stagnate Despite Rosy Forecast
In Wall Street's latest season of discontent, even extraordinarily good news is apparently not good enough.
Movie studio MGM (MGM - Get Report), in a bid to jumpstart a stock price hovering near a 52-week low, said Thursday that it would blast past Wall Street earnings estimates for the third quarter by at least 9 cents a share, making it one of the few companies to preannounce good news for this slowdown-stricken quarter. But Friday, despite a solid rally in the stock market, MGM shares fell 31 cents to $18.81.
MGM plunges despite positive forecast
SurgingThe strong quarter the company is predicting comes despite the fact that its studio released only one major film during the quarter, the Richard Gere-Winona Ryder weepie Autumn in New York, which has grossed a moderate $37 million. MGM is splitting that with co-distributor Lakeshore Entertainment. Daniel Taylor, the company's chief financial officer, credited the surge in cash flow to "MGM's increasing penetration into the dynamic DVD market and aggressive television licensing activities worldwide." "Clearly, their library is generating more cash flow than we expected," says Jeffrey Logsdon, entertainment analyst at Gerard Klauer Mattison. MGM's library consists of some 4,100 movie titles and another 9,000 TV shows, second only in the industry to Time Warner's (TWX) stable, Logsdon notes. He estimates that the company's collection of old movies and TV shows is probably going to generate some $200 million to $210 million in annual operating income.
CuttingLogsdon adds that even Autumn in New York will likely turn a modest profit because MGM's management has gotten the company's overhead under control; historically, Hollywood studios' ability to turn a profit has been hampered by high fixed costs. Logsdon, who just joined Gerard Klauer this week, has yet to initiate coverage on MGM; he says the firm hasn't done any underwriting for the company. Under the management team of Chairman Alex Yemenidjian and President Chris McGurk, MGM has posted consecutive profitable quarters since the third quarter of 1999. The studio has gotten a shot in the arm from the most recent installment of the most enduring film franchise in history, the release last November of the 19th James Bond movie, The World Is Not Enough. Logsdon says that movie is still helping the studio via DVD and home video sales. As for why the stock continues to falter, Logsdon says it is probably as much a matter of timing as anything: "If you announce good news on a day where the market drops 300 points, maybe it doesn't get absorbed with as much enthusiasm as it otherwise would."
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