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 Quote), 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.

Silver Scream MGM plunges despite positive forecast

The company said it expects to report earnings in the range of 10 to 13 cents a share, well above analysts' consensus estimate for earnings of a penny a share. MGM also said it expects cash flow from operations to exceed the $40.2 million it reported in the same period a year ago. MGM said it will report third-quarter earnings on Oct. 24.

Santa Monica, Calif.-based MGM released the earnings outlook the day after influential Merrill Lynch analyst Jessica Reif Cohen predicted an "uneventful" quarter that will see both revenue and cash flow for the studio decline from last year's levels. MGM shares fell $2.88, or 14%, in early trading Thursday, but the encouraging earnings preannouncement helped moderate the drop to 7%, and the stock closed Thursday at $19.13.

Reif Cohen didn't immediately return a call seeking comment Friday. She maintained her "neutral" rating on MGM in the report she released Wednesday.

Surging

The 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 Quote) 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.

Cutting

Logsdon 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."