Analyst Downgrades Lionsgate on 'Earnings Cliff' Threat in 2017
The end of the "Hunger Games" movies could produce a profit shortfall unless the mini-major can develop more franchises, Doug Creutz writes.
TORONTO – Lionsgate's The Hunger Games: Catching Fire is hitting theaters on November 22 and is expected to build on the teen movie franchise, judging by the mini-studio's recent stock appreciation.
But Cowen and Company analyst Doug Creutz on Wednesday downgraded Lionsgate due to a possible "earnings cliff" in 2017 after The Hunger Games franchise finishes.
Creutz raised his price target for the mini-studio from $32 to $36, while also lowering Lionsgate's rating from outperform to market perform.
His research note said the Twilight and The Hunger Games franchises will contribute to 62 percent of Lionsgate's total EBITDA between full-year 2013 and 2016.
"After the last Hunger Games movie passes through its theatrical and initial home video windows in FY16, we think Lionsgate faces a roughly $200 million hole in EBITDA in FY17," Creutz said.
The Cowan analyst said Ender's Game, which is set for a Nov. 1 release this year, is unlikely to become a franchise film.
And while The Hunger Games: Catching Fire will perform at the box office, Creutz anticipates a possible "sell-the-news reaction" by investors after its November release.
He's bullish about Divergent as a likely franchise for Lionsgate, though with a performance below that of The Hunger Games.
The bottom line is that Lionsgate needs new franchises to follow The Hunger Games if it hopes to maintain its current valuation and investor confidence.
"We believe it is hard to justify a higher valuation premium relative to the overall media group than Lionsgate already enjoys given uncertainty about long-term earnings power," Creutz said in his research note.