Lionsgate keeping its Street cred

Analysts upbeat despite soft 'Hostel' bow, reduced fiscal guidance

NEW YORK -- Despite some recent boxoffice pain and a lower-than-expected fiscal guidance, Lionsgate continues to draw support from many on Wall Street.

The mini-major underperformed with the $8.8 million opening of "Hostel: Part II" this past weekend and has provided a lower financial guidance for its current fiscal year than some hoped. Still, many analysts continue to rate Lionsgate's stock a "buy" and are bullish on the company's future. Several Street watchers are citing a recent film-financing deal as benefiting the firm -- the rare stand-alone movie studio -- even though it puts a short-term drag on the bottom line and investors don't seem to fully understand it yet.

On Wednesday, Lionsgate shares closed down 0.5% at $11.32. That gave the company a market capitalization of $1.3 billion, according to Bloomberg. The stock has traded from $8.48-$12.11 during the past year.

Ahead of the "Hostel: Part II" boxoffice start this past weekend, Oppenheimer & Co. analyst Thomas Eagan had already warned investors that expectations on Wall Street for the film's boxoffice intake likely were too optimistic.

On Monday, Eagan said that the $8.8 million opening haul was even "below our expectations of approximately $11 million-$12 million and below some estimates as high as $20 million."

The original "Hostel" opened at $19 million and went on to reach $47 million.

Eagan expects the sequel to "follow typical pattern(s) (with) opening weekend amounting to 40%-42% of total domestic boxoffice." That would mean that "Hostel: Part II" will reach $21 million-$23 million in the U.S. and generate a total profit of about $8 million-$10 million, according to Eagan.

Wedbush Morgan Securities analyst William Kidd argued Monday that the bloodletting on "Hostel: Part II" is "material enough to be felt" in the firm's financials this year.

"Lionsgate is feeling some pressure as the boxoffice continues to be too crowded for smaller-budget and horror films," Kidd said.

But despite this, he added that he is "still positive on the story." So much so that he maintained his "buy" rating on Lionsgate and his $13 price target.

Similarly, Eagan maintained his "buy" rating and recommended that investors buy the stock on any weakness "as we believe the market doesn't fully appreciate the benefits" of the recent 23-picture financing deal based on $200 million in funds from a blue-chip consortium.

"As these benefits are better understood, we expect the stock will appreciate to reflect the value created," Eagan said. He added that "the market is overly concerned about the negative impact" the film fund will have on operating cash flow in the current fiscal-year 2008.

After all, profitability will be hit as Lionsgate under the deal must for accounting reasons expense not only its own production and marketing spending but also that incurred by the fund partners as well, he said. Lionsgate's fiscal-year 2008 guidance calls for an operating cash flow loss of $40 million, compared with a $45 million profit in fiscal 2007, and a net loss of $50 million, a swing from a $27 million profit.

Kidd said the funding deal leads to "accounting distortions," though that might create unnecessary investor concerns.

He added that the deal allows Lionsgate to produce bigger-budget films, proving that "the company shares our expectation that Lionsgate will successfully move its business upstream into larger films."

In another optimistic report, Miller Tabak + Co. analyst David Joyce this month increased his price target on Lionsgate shares by $1 to $14 and reiterated his "buy" rating.

He also cited the "negative earnings turn" in fiscal-year 2008, but predicted "modestly higher" free cash flow over time as the new financing arrangement allows Lionsgate "to step up its film acquisition and production volume, while sharing essentially half of the cost (and risk and profit)."

Meanwhile, with a "neutral" rating, Susquehanna International Group analyst Michael Kelman is more bearish on Lionsgate's stock than many peers because of general concerns about the film business.

"Earnings volatility is likely to continue in this inherently hit-driven business," he wrote in a recent report. "As such, we would continue to be patient and would wait for a better entry point with this stock, as we believe near-term upside should be relatively limited."

But even the less-bullish Kelman lauded the new film-finance facility, predicting it should have the biggest negative impact during the next year.

"The gap between (operating cash flow) and free cash flow should continue to expand during fiscal 2008, though this should begin to narrow in fiscal 2009 -- leading to improved results across all operating metrics," he said.

If at least some of the analysts are correct, Lionsgate shares could move higher from here. Year-to-date, the stock is up 5.5% from its Dec. 29 close of $10.73.
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