Lionsgate Shares Rebound After Friday's Sell-Off

'Orange Is the New Black'

Market watchers pointed to upside from TV business, including 'Orange Is the New Black' renewal, after studio missed on movie profit expectations.

Shares in Lionsgate rebounded Monday after Friday's sell-off, even as analysts put the future of a studio merger with Starz in doubt.

"This stock pullback is well overdone, in our view, and creates a great entry point," J.P. Morgan analyst Alexia Quadrani said in an investors note ahead of stock in Lionsgate climbing $1.12, or 6 percent, to $19.64 in early morning trading on the New York Stock Exchange.

That rebound followed the studio's shares falling 27 percent to $18.53 on Friday in New York after movie profits came up short. By late morning Monday, stock in Lionsgate was losing steam and fell to $18.47, or down 5 cents on the day.

Analysts late Friday pointed to last week's stock flop complicating talks for the studio to merge with U.S. cable channel Starz. "We think this move in the equity could break up near term talks between Lionsgate and Starz (since Starz has been following LGF), so both can repurchase shares aggressively at present levels as short term this could make sense," FBN Securities analyst Robert Routh said in an investors note.

Talk of a merger with Lionsgate was strong ever since Starz shareholder and billionaire investor John Malone in early 2015 joined the studio's board after a stock swap. The consensus was Malone would get a tax inversion for Starz and the premium cable channel would gain from access to Lionsgate's film and TV product.

But, after Friday's stock falls, Routh added a rival studio like Sony, Vivendi or Fox could step in with their own bid for Starz, "as doing so here could make sense even if the bidder doesn’t end up with the premium channel operator." Shares in Starz also rebounded Monday morning, rising 57 cents, or 2.3 percent, to $24.87.

Other analysts point to competitive pressures on the pay TV sector, and Lionsgate execs insisting they will only acquire Starz at the right price, to suggest no immediate deal for the premium cable channel is likely. "We do not expect an overly competitive auction if Starz were for sale," Jefferies analyst John Janedis said in a note to investors.

Lionsgate last Thursday reported reduced earnings for the third quarter of fiscal 2016 after telling investors the studio was in talks with Starz about a potential combination. Analysts are looking beyond Lionsgate's disappointing theatrical box office in the third quarter  marked by The Hunger Games: Mockingjay — Part 2 falling short of earnings estimates  to see profits down the line from TV and other diversified asset base at the studio.

"We are lowering our target price on Lionsgate to $25, though we remain buy rated as we believe the current equity price somewhat overlooks a business model that has evolved (broadening of product mix, debt reduction and EPS gains) since the first Hunger Games," Stifel analyst Ben Mogil wrote in an investors note. 

Evercore ISI analyst David Joyce said Lionsgate's platforms and relationships remain unchanged, despite its stock going into freefall after its latest earnings release. "The hit to the stock on Friday was due to the surprisingly low-margin that Mockingjay 2 evidently was, but this would not be a recurring trend  film margins should improve in 2017," Mogil wrote in his own note.

Market observers still questioned the quality of Lionsgate's new-picture slate. Wunderlich analyst Matthew Harrigan argued in a note that Lionsgate needs "significant performance" from current and potential franchises like The Divergent Series: Allegiant and Power Rangers, and one-off releases like Deepwater Horizon, to see film margins climb in 2017.

Feb. 8, 11:05 EST Stock value of Lionsgate updated.