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October 31, 2006

A Halloween Update for Lionsgate

I haven’t written much about Lionsgate (LGF) since my ill-timed sale this spring when the shares were 25% lower. Obviously, I am annoyed at the poor timing of my sale but I still don’t trust (or maybe don’t understand) the numbers that are flowing the company’s income statement, balance sheet, and cash flow statement.

Anyhow, seeing as it is Halloween and LGF's latest horror film, Saw III dominated the weekend box office, it seems like a good time to revisit the stock.

LGF hit their numbers last quarter which built confidence in the stock. Following the June quarter, the key to the stock's performance has been the good box office reception of the company's film slate. LGF shareholders understand that timing issues related to film accounting may cause unusual volatility in the current quarter but the fact that the company's three key releases for summer and fall, Crank, Employee of the Month, and this past weekend's Saw III, all performed at least as well expected suggests that 1H07 results should be good. Each film will flow through the DVD window at that time which should allow LGF to report excellent results....

Saw III opened last weekend and for the third straight year, the franchise scored with moviegoers. The original film in the series opened to $18.3 million and built a reputation as a thinking person's horror film during LGF's well orchestrated DVD campaign. The growing popularity of the franchise led to the second film opening at $31.7 million a year ago. This past weekend, Saw III opened at $34.3 million, 8% ahead of the second film. The second film ended its domestic run at $87 million, a figure likely to be slightly eclipsed by the third film. Opening night for III was 16% ahead of II but the whole weekend was up 8%. This might indicate that the stronger opening is the results of horror fans coming out sooner to the latest installment as opposed to significant growth in the overall franchise. Regardless, Saw is a smash hit for LGF and the 4th films is set for release the final weekend in October 2007.

LGF is a valuable asset as the only large sized independent film and TV production company. If the company were sold, I'd expect a significant premium to the current price, say 30-40%. Asset value probably will support LGF shares at no worse than $8 so the risk of holding of the stock is not that great. I see the stock as fairly valued around $10 with limited upside within a broader $8-$13 range.

Until LGF can show that its operating performance, as opposed to balance sheet changes, can support and expand the current level of free cash flow, I plan to remain on the sidelines.

Posted by Steve Birenberg at October 31, 2006 09:26 AM in LGF