Lionsgate is roaring in Hollywood -- and on Wall Street
The independent studio Lionsgate, which made 'Crash' and 'Saw II,' is seeing big numbers at the box office and in its stock price.
NEW YORK (CNNMoney.com) – There's been a lot of talk about the box-office slump in Hollywood. But if you're looking at the results of independent film studio Lionsgate, you'd think Tinseltown was on a roll.
Lionsgate, the studio behind Best Picture Oscar-nominee "Crash" and last year's horror-movie smash "Saw II," is expected to report solid fiscal third-quarter results on Thursday. Analysts expect sales to increase 18 percent to $225 million and earnings to surge 56 percent to 16 cents a share from a year ago.
Indeed, 2006 appears to be getting off to a promising start as well. The company's latest horror flick, "Hostel," which it co-distributed with Sony, has made nearly $50 million at the box office since being released in early January, according to movie research company Box Office Mojo.
Big bucks from low budgets
Analysts also have high hopes for "Madea's Family Reunion," due out later this month. That's the sequel to last year's "Diary of a Mad Black Woman," a film, based on the play by comedian Tyler Perry, that generated $50.6 million at the box office last year.
Considering that it only cost $5.5 million to make, it was a huge profit-maker for Lionsgate (Research). Movies like "Saw II," which grossed $87 million at the box office, and "Crash," with $53 million in ticket sales, have also been good to the company's bottom line thanks to relatively low production budgets.
But does the stock already reflect this Lion's mighty roar? Shares are up more than 15 percent already this year and analysts say that some of this increase has more to do with takeover chatter than the company's hit-making prowess.
In December, Viacom's (Research) Paramount unit announced that it was acquiring DreamWorks SKG. And last month, Walt Disney (Research) agreed to buy animated studio Pixar (Research). With that in mind, some on Wall Street have started to wonder if Lionsgate, one of the few remaining independent studios of significant size, could be the next to go.
"Anytime there is increased merger and acquisition activity in the studio area, interest gets piqued on Lionsgate," said Michael Kelman, an analyst with Susquehanna Financial Group.
Kelman doesn't think Lionsgate is looking to sell, however, so he said investors should be a little wary of the stock at these levels.
Rather, he thinks that it is more likely a buyer of smaller studios. He points out that the company recently acquired Redbus, a leading British independent film distributor, as well as the North American rights to distribute films from Mach 8, a company that has a sizable library of Spanish-language films.
"Lionsgate is in a good spot. It has a chance of becoming a dominant player in the independent arena," he said.
Matthew Harrigan, an analyst with Janco Partners, says the company's success with horror movies, the Tyler Perry films and the recent acquisition of the Mach 8 library show that the company has been smart to target niche audiences that may not be interested in mainstream Hollywood fare.
"They have created some good box-office franchises," Harrigan said. "Lionsgate is really addressing a niche that is quite underserved."
Oscar noms should boost DVD sales
Critical acclaim could help the company's near-term results as well. "Crash," which is already out on DVD, is currently the 10th best-selling DVD on Amazon.com. Harrigan sees a further boost to DVD sales between now and next month's Academy Awards ceremony and that could help lift revenue in the fiscal fourth quarter, which ends in March.
"There's no doubt that the Oscar nomination will help DVD sales. Something like that can legitimately move the needle for Lionsgate because the company is small. Getting Oscar buzz can be very material," he said.
Kelman agreed that the Academy Award nominations (the movie also received Best Director, Best Original Screenplay and Best Supporting Actor nods) should boost DVD sales for "Crash."
And Harrigan said that even though a takeover isn't likely in the near future, he wouldn't be surprised if the company is eventually acquired.
He said the company's strong film library, which includes popular movies such as "T2: Judgment Day," "Reservoir Dogs" and "Rambo: First Blood," could be an attractive fit for cable company Comcast (Research), which was an investor in a Sony (Research)-led consortium to buy MGM in 2004.
But even if the company isn't bought anytime soon, Harrigan thinks the stock could hit $13 within the next year, more than 40 percent higher than current levels.
For more about the dollar impact of Oscar nominations, click here.
For more about the Disney-Pixar deal, click here.