Update: MGM Returns to the Noir for Third Quarter

The studio reports its first profit in nearly three years, earning 7 cents a share for the third quarter.
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Metro-Goldwyn-Mayer

(MGM) - Get Report

, citing a strong box-office performance, handily beat Wall Street's earnings expectations for its third quarter.

The Santa Monica, Calif., entertainment company said Tuesday morning that it earned $10.3 million, or 7 cents a share, in the third quarter, reversing a year-earlier loss of $40.3 million, or 61 cents a share. (The most-recent quarter had 151.3 million average shares outstanding, while the year-earlier quarter had just 65.8 million.) Analysts had expected a loss of 19 cents a share, according to

First Call/Thomson Financial

.

Earnings before interest, taxes, depreciation and amortization, a key indicator of financial health for entertainment companies, reached $40.2 million, compared with negative EBITDA a year earlier of $11.5 million. Third-quarter evenue jumped 15% to $299.3 million from $259.6 million.

It was MGM's first profitable quarter in nearly three years. The results included the release of three movies,

The Thomas Crown Affair

,

Stigmata

and

Tea With Mussolini

, as well as gains from MGM's television division, the company said.

The following story was posted at 9:15 p.m. EDT Monday:

MGM's Rebound Has Investors Looking for Action

Alex Yemenidjian, the new head of

Metro-Goldwyn-Mayer

(MGM) - Get Report

, wants to turn back the clock.

Since 1990, MGM, the studio responsible for

The Wizard of Oz

, has been through more turmoil than a breakaway Russian republic, including a bankruptcy filing and a series of ruinous contracts that put much of the company's huge film library in the hands of its competitors. Even the support of billionaire financier

Kirk Kerkorian

, who put his resources behind MGM three years ago, hasn't kept the studio from staggering, producing only a few forgettable new movies.

Now Yemenidjian, installed in April by Kerkorian as chairman and CEO of MGM, has turned his energies to rescuing the studio. There's a lot at stake for both Kerkorian, who owns about 90% of MGM, and Yemenidjian, who was given a massive option grant when he agreed to add MGM to his workload five months ago. He already is president of

MGM Grand

(MGG)

, a casino company Kerkorian controls.

MGM announces earnings Tuesday morning, and Yemenidjian's all but promised that the results will offer the first taste of a new, more profitable MGM. Wall Street is expecting great things: MGM stock is already up more than 60% since Yemenidjian took over and is no longer cheap, even by the lofty standards of the entertainment sector. (For a note on the recent stock movement, click

here.) Now Yemenidjian, who earned investors' respect at MGM Grand, is about to find out if his experience on the Las Vegas Strip can translate to Hollywood.

It's far from a sure bet. Though the casino business can be tough, it's cozy compared to the big leagues of the entertainment industry. With a market cap of less than $4 billion, MGM is a minnow compared to $70 billion whales like

Time Warner

(TWX)

, which sometimes seem to view their studio divisions as loss leaders.

Reel Gains
MGM shares stage a rebound following Yemenidjian's appointment

Source: BigCharts

So what has investors excited? In an interview last week, Yemenidjian outlined a three-pronged strategy to turn around the studio. The company has already made short-term strides by cutting its operating costs and buying its way out of the costly deals it has signed with other studios to distribute its film library. Those moves will lower its expenses by $40 million annually, Yemenidjian says. (For its latest quarter ended June 30, MGM reported a loss of $250 million on revenue of $212 million.) MGM also expects to get more cash out of its old films through an improved distribution deal it has signed with

Fox

(FOX) - Get Report

.

The cost cuts, along with the solid performance of MGM's two most recent movies, have left Yemenidjian optimistic that MGM's third-quarter results will impress investors. He notes that the company moved up its earnings announcement by three weeks to beat the late October rush, usually a sign that management wants earnings to be noticed.

In addition, the studio is combing its library for films that might make good remakes. To that end, it has signed a co-production agreement with

Miramax

(a

Disney

(DIS) - Get Report

unit) to make eight new movies, six of which will be based on films in MGM's library. The move gives MGM better access to A-list actors, who are more likely to take a chance on a quirky remake if it has Miramax's seal of approval.

But if MGM is to succeed in the long term, it needs a new revenue stream, not just a couple of hit movies. To that end, Yemenidjian is working to create several new MGM-branded cable networks, including science-fiction and comedy channels.

For MGM, the problem is finding cable operators to distribute its offerings. Space on analog cable systems, which serve the vast majority of homes with cable, is at a premium, and most new cable channels have had to pay steep per-subscriber fees to get distribution. Yemenidjian won't rule out spending some of MGM's new war chest to get distribution, but it's more likely that he'll settle for digital distribution through satellite services and the slow expansion of digital cable.

Either way, building a cable network is Yemenidjian's top medium-term priority, and he hopes to announce at least some deals by year-end.

In the long run, Yemenidjian wants to make MGM big enough to compete with its much larger cousins, either by buying more assets or selling to another entertainment company. Unfortunately, most of MGM's obvious potential partners already have studios. (For a detailed look at who owns what in the entertainment business, click

here.)

Unfortunately for investors, MGM's recent run-up means it's no longer a bargain, at least in the short run. After the rights offering, the company will have 200 million shares outstanding, along with $700 million in debt. That gives it a total value of about $5 billion. The company has guided investors to expect it will have around $250 million in cash flow next year, giving it a total value of 20 times cash flow, compared to 11 to 16 times cash flow for the company's much bigger competitors.

Even assuming Yemenidjian is leaving himself room to beat expectations and MGM turns in $300 million in cash flow next year, the company is still trading at a premium to companies like Time Warner. That's surprising given MGM's lousy recent history, but a testament to the high regard investors have for Yemenidjian and Kerkorian.

Ken Korngiebel of

Columbia Management

, an Oregon fund management company that has more than $20 billion in assets, compares Kerkorian to John Malone, who made investors fortunes at both

TCI

, now a unit of

AT&T

(T) - Get Report

, and

Liberty Media

(LMG.A)

. Columbia doesn't own MGM, but it subscribed for 2 million shares in the just-canceled offering. "There's a Malone factor with Kerkorian -- when he's made money, other people have made money with him," Korngiebel says. "And Alex's record at the casino -- he made people a ton of money."

Now investors are about to find out if Yemenidjian can do the same in Hollywood, where it's the players who have the edge.