Oscar-nominated movie companies aren't always good investments, but Lions Gate ( LGF) is looking like the little studio that could. Attention will inevitably swirl around its Oscar contender Crash leading up to Sunday's awards ceremony. But it's the company's tight focus on making cheap, good movies -- along with a substantial film library -- that is helping it stand out from the crowd. As the largest independent studio, with a market cap of around $1 billion, the Canadian-bred film producer has emerged as a feisty presence at the box office despite its low-budget ways. Crash, for example, cost just $6 million to make and has grossed over $83 million in worldwide box office revenue. It also has seen DVD revenue of $40 million. Fans say that kind of success is no accident. Unlike the megastudios -- Time Warner ( TWX)-owned Warner Bros., Viacom ( VIA)-controlled Paramount and Dreamworks Animation ( DWA) -- the success of Lions Gate's films largely determine the fortunes of the company, making the investment thesis a little clearer for Wall Street. Warner Bros. and Paramount put a lot of cash down on their movies for production, printing and advertising. The expectation is that the costlier films will become profitable after their box office run, in the so-called DVD and pay TV windows. Lions Gate, on the other hand, sees returns on a successful film almost immediately. "Most studios don't rely on making money in the theatrical frame," says Sanders Morris Harris analyst David Miller, who rates Lions Gate a strong buy. Miller doesn't own Lions Gate. Sanders Morris Harris does some corporate financing work for the studio. So to a large extent, Lions Gate rises and falls in the market largely on the performance of its latest box office release. When a Lions Gate movie stumbles out of the gate, as two did in the fall, the marketing budget is quickly pulled, but the damage is done. Where a larger studio can absorb a couple of misses without much notice, Lions Gate is more exposed.
As a result, the stock has had a bumpy ride. In December, Lion's Gate hit a 52-week low of $7.49, though it has since rebounded to fetch more than $9 this week. "The stock got deep-sixed down to the mid-$7 range in the fall," says Miller. The release In the Mix failed to captivate audiences. Miller says that the selloff reflected impatience among investors. But that hardly makes the studio immune to other market forces, such as a slowing home video market. The company, which missed earnings targets in February thanks to DVD softness, lowered its guidance for 2006 accordingly. That hasn't stopped it from heading north 20% so far this year. And some Lions Gate investors feel that there is acquisition potential. Miller notes that some hedge funds clearly would like to see a major studio swoop in and buy the company, and others see cable operators as a natural acquirer. The film library brings in some $200 million of revenue a year, covering the company's overhead. Some investors say the value of the 5,600-film library is priced into the stock. What is left out, according to Miller, is the possibility that an additional line of business could be thrown in to the mix. That could come in the form of a horror-oriented network that could reap a bounty of transmission fees from cable operators. Lions Gate has some 1,700 horror/sci-fi films in its library, more than enough to fill the pipeline. In the meantime, Madea's Family Reunion, Lions Gate's latest, was No. 1 at the box office last weekend, grossing over $33 million with a production budget of just $6 million.