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Put Yourself in Movies
By Michael Brush
September 08, 2005
Just like Pixar (PIXR)
and DreamWorks (DWA),
film company Lions Gate Entertainment (LGF)
has suffered a string of weaker-than-expected movie releases in recent
months.
But unlike Pixar and DreamWorks, Lions Gate has seen insiders step up and
plow money into company shares, in the sell off caused by the box office
weakness. Insiders have purchased over $880,000 worth of stock since August
12 at prices from $9.34 to $9.70.
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That’s a great signal that Lions Gate will find a way around current
problems in the movie industry. The last time the insiders swooped in and
bought in early 2004, the stock more than doubled.
This doesn’t mean that Lions Gate stock is an easy double again from here.
But I think you could see 40% plus gains over the next twelve months.
The reason: Unlike the larger Hollywood film studio companies, Lions Gate
has carved out a successful, if tiny, niche that works. What’s more, a
surprising plot twist in the form of a buyout offer could send shares
considerably higher at some point.
Here’s a quick look at what sets Lions Gate apart.
* The niche. Lions Gate specializes in movies that are too
controversial, too gory, or too small for mainstream Hollywood studios.
Lions Gate, for example, helped distribute films like Michael Moore’s
"Fahrenheit 9/11" and Rob Zombie’s “House of a 1000 Corpses” – both
considered too hot to handle by the major studios that originally funded
them. Besides "Fahrenheit 9/11," recent hits included "Open Water," "Saw,"
"Diary of a Mad Black Woman," and "Crash."
* Tight cost controls. The typical box office take on a Lions Gate
film can come in at around $25 million. That’s a pittance compared to
Hollywood blockbusters. But Lions Gate’s conservative approach to financing
movies almost assures decent profits on most projects. Meanwhile, Lions Gate
still attracts big Hollywood stars -- like Robert De Niro, Dustin Hoffman or
Halle Berry -- by giving them a substantial take, promising a quick shoot,
and appealing to their dreams of doing films that can reach critical
acclaim.
* The library. Lions Gate has a film and TV library with over 9,000
titles. This provides a steady, underlying stream of cash. Many investors
worry that the library business at Lions Gate’s will get hit by high DVD
returns from stores. That’s one problem that hurt both Pixar and DreamWorks
recently. Robert Routh, who covers Lions Gate for Jefferies & Company,
thinks those investors have it wrong because Lions Gate does a better job of
managing supply and demand.
But what might turn around the movie business at Lions Gate? Analysts point
to four upcoming releases: The Nicolas Cage thriller "Lord of War" due out
Sept. 16, the teen comedy "Waiting," a sequel to last year's horror success
"Saw," and a Tyler Perry sequel called “Madea’s Family Reunion.”
“We expect the company to easily surpass the targets they have laid out for
themselves as results improve as the year goes on,” says Routh, who has a
$14 price target on the shares which recently traded for around $10. Routh
has been right so far on the stock. He originally recommended it at $2 years
ago.
Routh also thinks Lions Gate will implement a share repurchase program – a
move that’s popular with investors these days. Then there’s the buy out
potential. “Simply stated, either the Lion gets bought or the Lion gets
bigger and then gets bought, given the recent wave of consolidation that has
been occurring in the industry,” says Routh.
The bottom line: Lions Gate has a winning formula of turning out a
consistent flow of successful – if small – movies while keeping a lid on
costs. That’s the opposite of the extravagant spending of Hollywood whose
big budget productions may be getting studios in trouble now that the box
office is so weak. Lions Gate stock has been held back because investors
think these problems, and DVD returns, will spread to Lion’s Gate. But the
insider buying suggests they are wrong. I think that makes the stock a buy
right here. Patient buyers might wait for prices below $10, if Wednesday’s
afternoon rally fades.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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