Lions Gate Entertainment (LGF) may be struggling under reports that the latest installment of the Hunger Games franchise released last weekend fell short of expectations, but analysts say the studio's bruised stock is prime for a rebound thanks in part to a flourishing television business.
"The market has mispriced several opportunities through which we see significant upside going forward," said Macquarie Capital media analyst Amy Yong in a Nov. 24 investor note.
Lions Gate has suffered sharp declines in recent sessions, with shares tumbling 16% from an all-time high reached two weeks ago following investment from Liberty Global (LBTYA) and Discovery Communications (DISCA) . Shares of Santa Monica, Calif.-based Lions Gate were falling 2.2% Tuesday to $34.25.
The Hunger Games: Mockingjay, Part 2 drew about $102.4 million in domestic box office receipts over the weekend, more than Sony (SNE) Pictures' Spectre with $15 million last weekend (bringing Spectre's total to $154.1 million). But the Hunger Games finale failed to match the opening weekends of Lions Gate's three previous Hunger Games films. Mockingjay, Part 1, which debuted in November 2014, generated $274.9 million during its opening weekend.
But investor dissatisfaction with Lions Gate may be overlooking the studio's 2016 lineup, argues Macquarie's Amy Yong and Wunderlich Securities media analyst Matthew Harrigan.
Both maintain that although Mockingjay, Part 2's opening weekend draw was less than previous Hunger Games films, the movie is still drawing large crowds, is already profitable and may still meet analyst projections for $350 million once the holidays begin in earnest.
Furthermore, Lions Gate is making more television programming. The company earlier this month acquired a stake in Pilgrim Studios, the independent movie house owned by Craig Piligian, which The Hollywood Reporter said was a controlling position priced at around $200 million. Pilgrim's slate of 47 television series across 27 networks goes a long way toward expanding Lions Gate's own original programming portfolio.
"Given the higher-margin genre of unscripted, the [Pilgrim] asset will likely accelerate the path to a stated goal of mid-teens TV margins," said Yong. Macquarie has an outperform rating and a $47 price target on Lions Gate.
She said Pilgrim will likely add another $100 million in revenue and "could help Lions Gate bridge the gap to $750 million to $800 million in annual TV revenue."
Pilgrim owns the long-term rights to most of its shows, which include Ghost Hunters (on Syfy), Welcome to Sweetie Pie's (on OWN), Wicked Tuna (on National Geograhic) and The Ultimate Fighter (on Fox Sports 1).
Giving Lions Gate further upside, Yong also cited potential partnerships with Charter Communications (CHTR) (once it closes its acquisition of Time Warner Cable (TWC) ) as well as ITV/TV3, Mexico's Televisa (TV) and All3Media. Any of those partnerships would serve Lions Gate well, she said.
Digital streaming growth should further help boost Mockingjay, Part 2's positive impact on Lions Gate, which is indeed "very sensitive to new production success," said Matthew Harrigan, a media analyst at Wunderlich Securities in a Nov. 23 investor note.
"Lions Gate needs significant performance from new (and newer) franchises like The Divergent Series: Allegiant and Power Rangers, and one-offs like Deepwater Horizon," Harrigan said, noting that both Divergent and Now You See Me sequels could each generate $100 million in profit next year.
Wunderlich has a buy rating and a $43 price target on Lions Gate stock.
Harrigan anticipates that Lions Gate is likely to benefit from consolidation in the media sector. With its "compelling theatrical film backbone," Lions Gate would likely be best served with a merger between Starz (STRZA) , of which Lionsgate owns 4.5%, or Epix, of which Lions Gate owns 31.2%, he said.