Lions Gate Entertainment (NYSE: LGF), the little studio that makes big waves in Hollywood with franchise hits such as Saw and Hostel, distributed its annual earnings numbers on Friday after market close. For fiscal 2008, revenues leaped like a lion (you knew that was coming, don't kid yourself) to $1.36 billion, which represented top-line appreciation of 39%. So far, an excellent start. But, it's the bottom line where things start to get ugly. Lions Gate reported a net loss of $0.62 per diluted share; in 2007, the studio booked net income of $0.25 per share. That can't be pleasing to shareholders. According to Marketwatch, Lions Gate did not meet expectations, as some on Wall Street believed the loss would be closer to $0.50 per share (the company did beat on the top line, though). Things were rosier for the fourth quarter, as revenues jumped over 50% and net income climbed 19% to $0.22 per share. Unfortunately, expectations were again too high, as analysts were hoping for $0.37 per share.
The cash flow is a little more pleasing. Operational cash flow increased just shy of 50% to $89.2 million. And the company adjusted this stat even further to come up with a free-cash-flow figure of nearly $137 million (the company adds back the effect of borrowings for production obligations). The huge problem here is a familiar story: rising costs for marketing and distribution. This isn't unique to Lions Gate; competitors such as Disney (NYSE: DIS), Time Warner (NYSE: TWX), Viacom (NYSE: VIA), and Sony (NYSE: SNE) all face this same issue. Management reported that costs for Lions Gate in this regard rose well over 100%.
Lions Gate is a tough one for me. Here's the thing: I love the movie business, and Lions Gate is definitely a more direct play on the business than what you get through a Disney or a Time Warner due to the scales involved. Lions Gate has some great franchises under its belt, and it tends to go for niche, edgy content. Plus, the cash flow is pretty cool.
Father's Day is around the corner. Why not spend some time looking at the coming earnings and how Dad's Day may have an impact. It is funny to see how many of the companies reporting earnings this week actually have links to Father's Day.
While this column has been obviously bearish of late, there are a few potential winners that may appear, just in time for the big day. Time to stock up on gifts for dear-ole-dad, or get farther away from stocks? You tell me... (by the way, comments and ideas are always appreciated)
Monday, May 26
Markets will be flat. I am certain that stocks on the U.S. Market will close at the exact price they closed last Friday. But what do I know!
While the earnings season is beginning to wind down for the current quarter, there are still plenty of results to come. Here's a peek at what analysts surveyed by Thomson Financial are expecting from companies scheduled to report results in the final week of May 2008.
These companies are expected to post earnings growth, compared to the same period in the previous year:
Dell Inc. (NASDAQ: DELL) down 2.9% to 33 cents per share, on $15.66 billion in revenue
TiVo Inc. (NASDAQ: TIVO) is expected to swing to a loss of a penny per share, compared to a penny profit a year ago, and report $55.62 million in revenue. And analysts expect Borders Group Inc. (NYSE: BGP) to narrow its loss 7.8% to 47 cents per share, on $801.11 million in revenue.
The movie business is changing, my friends. According to the following Hollywood Reporterarticle, Time Warner (NYSE: TWX) intends to release its DVD products to retail shelves and video-on-demand at the same time -- the so-called "day-and-date" paradigm. CEO Jeff Bewkes announced this plan during Time Warner's earnings conference (check out Jon Ogg's coverage of the media conglomerate's quarter). Bewkes seemed satisfied that experiments with the strategy worked out well, proving that issues of cannibalization are overblown and that the margin scenarios are too cool to ignore. And, oh, those margins are awesome -- whereas you're talking maybe as high as 30% for a disc, a VOD protocol might yield 70%. That is a huge difference. And wait, here's another Hollywood Reporter piece coming online as I was writing this article, this one about Apple (NASDAQ: AAPL) wanting in on the day-and-date excitement. The trade paper is reporting that iTunes will announce that it has struck a deal with the major studios -- as well as Lions Gate Entertainment (NYSE: LGF) -- to release movies on its platform day-and-date with DVD releases.
Lionsgate Entertainment (NYSE: LGF) came out on top this past weekend. According to Boxofficemojo, the studio's film The Forbidden Kingdom took in about $20.9 million at domestic movie theaters, driven perhaps by the star power of Jackie Chan. That's more than I thought it would do. (I should point out, though, that all the numbers discussed here are based on estimates -- finalized figures will be out at a later date.)
Forgetting Sarah Marshall, from General Electric's (NYSE: GE) Universal Pictures, was second with $17 million (I also thought this might do less). Jason Segel is the star of the TV series How I Met Your Mother and was also on one of my favorite TV shows, Freaks and Geeks. Then we have Sony's (NYSE: SNE) Prom Night, which came in third with $9 million. That was quite a drop from last week's $20 million debut. In fact, going back to the spiel about estimates vs. final numbers, when I covered the box office winners last week, Prom Night was originally credited with a $22.7 million take -- this was eventually reduced to $20.8 million. I went and saw the movie last Thursday afternoon by myself -- I literally walked into a completely empty auditorium, first time that ever happened in my life (it was a large auditorium, too). Talk about creepy. Nevertheless, I guess I can see why Prom Night is fading so fast (it wasn't that bad of a film, I should mention). Sony's 88 Minutes and News Corp.'s (NYSE: NWS) Nim's Island took fourth and fifth places, respectively.
But the big story of the weekend could be found in Lions Gate's triumph. The little studio scored again. One has to wonder when one of the majors, or perhaps a consortium of private equity concerns, is going to finally step up to the plate and buy it out. Those speculating on such an outcome have been waiting a long, long time. I like to follow Lions Gate, and I'm waiting for its stock to break out at some point -- it's got to happen one of these days.
Disclosure: I own shares of General Electric; positions can change at any time.
Viacom's (NYSE: VIA) Paramount studio, MGM, and Lionsgate (NYSE: LGF) want their own pay TV channel. That means Viacom will cut ties with Showtime, owned by CBS (NYSE: CBS). MGM and Lionsgate will also break with the CBS property. The deal is more interesting since Sumner Redstone is chairman of both CBS and Viacom.
According toThe New York Times, "The deal raises the question of how Showtime will fill the feature film portion of its programming slate. Showtime pays more than $100 million a year to the studios to show their movies."
The new channel could end up ruining Showtime, hurting the CBS financials, and setting up new competition for HBO, but it is a sign of the times. Studios are seeing more and more premium video going to the internet. Some of that content is pirated. It is a cinch the new channel will be a better economic deal for the studios involved. They need the money.
The $100 million budget film used to be unusual. Now it seems to be the norm. Studios which cannot bring in more revenue though new distribution deals may see their P&L's falter, so they are aggressively changing their revenue models, even if it means cutting the throats of old friends.
Douglas A. McIntyre is an editor at 247wallst.com.
MOST NOTEWORTHY: Time Warner Telecom, Verigy and Brinker were today's noteworthy initiations:
Friedman Billings expects Time Warner Telecom (NASDAQ: TWTC) to post free cash flow growth above consensus expectations and believes carrier spending-concerns are overdone. The firm initiated shares with an Outperform rating and $20 target.
Oppenheimer initiated Verigy (NASDAQ: VRGY) with a Perform rating and $23 target, pointing to the company's tough year over year comps as PC unit growth slows in 2008 as well as its exposure to flash memory chips.
Brinker (NYSE: EAT) was assumed with a Neutral rating at Suntrust, as they expect Chili's to continue to be impacted by weak consumer spending.
OTHER INITIATIONS:
Baird assumed Ulta Salon (NASDAQ: ULTA) with an Outperform rating and $18 target.
Lions Gate (NYSE: LGF) was initiated at Jefferies with a Hold rating and $10-$11 target.
Landstar System (NASDAQ: LSTR) was initiated with a Market Perform rating at Morgan Keegan.
Who was the big winner at the box office this weekend? It was Sony (NYSE: SNE) and its 21 movie starring Kevin Spacey. According to early estimates at Boxofficemojo, the film took in over $23 million in its first three days of release. Looks like the market is finally getting at least a little tired of News Corp.'s (NYSE: NWS) Dr. Seuss' Horton Hears a Who! -- it fell to second place, raking in about $17 million, enough to put it beyond the coveted -- although not so impressive anymore -- $100 million mark.
Here, though, is the big surprise of the weekend from where I'm sitting -- maybe I'm not with it or something, but I thought that Superhero Movie was going to dominate. It was released by MGM and Dimension. How in the world could this have missed? It came in third with a horrible estimate of $9.5 million -- let's hope that number gets revised upward, because a gross of less than $10 million for a movie that should have been popular to the Scary Movie generationis pretty embarrassing. It seemed to have an effective marketing campaign, though; the commercials described what looked like a fun time at the multiplex, bringing home the fact that the spoof of films such as Spider-Man and X-men probably contained quite a few bellylaugh moments. Guess the timing just wasn't there for it.
Mammoths and multiplexes go hand in hand, apparently, especially if said mammoths are of the CGI variety. According to Boxofficemojo, 10,000 B.C., Time Warner's (NYSE: TWX) prehistoric epic, pounded the rest of its competition like an angry caveman warrior clubbing a saber-toothed tiger (I didn't see the film, but I assume this happened at some point during the plot). The film is estimated to have taken in over $35 million (final numbers are due later today) at domestic theaters over the weekend. Disney (NYSE: DIS) couldn't even come close to Time Warner -- its family comedy, College Road Trip, right now stands at a gross of $14 million, which was at least good enough for second place. Erstwhile Disney Channel phenomenon Raven-Symone star in the flick, so at least there was a little bit of synergy in that respect -- Disney is nothing if not about synergy, as we all know.
Sony's (NYSE: SNE) Vantage Point came in third, and Time Warner's Semi-Pro, starring the hilarious Will Ferrell, came in fourth. Lions Gate's (NYSE: LGF) The Bank Job, which achieved fifth position,actually did pretty well, considering that its per-theater average of approximately $3500 was much higher than the per-theater average for the two films above it.
UBS upgraded airliners including AMR Corp. (NYSE: AMR) from Sell to Neutral, Continental Air (NYSE: CAL), Delta Airlines (NYSE: DAL), UAL Corp. (NASDAQ: UAUA) and US Airways (NYSE: LCC) from Neutral to Buy. Delta was also upgraded by Bear Stearns from Peer Perform to Outperform. Most of these are gaining 3-5% in premarket trading.
Other notable calls include:
LDK Solar (NYSE: LDK) was upgraded from Sector Underperform to Sector Perform at CIBC World Marktes. Shares are up 5% in premarket trading.
Garmin (NASDAQ: GRMN) was downgraded by Deutsche Securities from Buy to Hold and the target price lowered from $125 to $90. Down 3% in premarket.
In addition to reaching an agreement with the EU today regarding its prices on iTunes downloads, Apple Inc. (NASDAQ: AAPL) Bloomberg reports that Apple will announce a new service on Jan 15 where iTunes users will now be able to rent movies for 24 hours for $3.99 as well as buy them. Apple will add News Corp. (NYSE: NWS) Fox and Time Warner (NYSE: TWX)'s Warner Bros. as suppliers, "according to people familiar with the agreements." Viacom Inc. (NYSE: VIA)'s Paramount, Walt Disney Co. (NYSE: DIS) and Lions Gate Entertainment Corp. (NYSE: LGF) will also be part of the agreement.
American Electric Power (NYSE: AEP) has agreed to pay penalties totaling $15M to end a Clean Air Act lawsuit brought by the Justice Department for the EPA, reported the Wall Street Journal (subscription required).
In 1992 Ecuador left OPEC, but this month is expected to rejoin the organization, according to the Wall Street Journal.
The UK is going to purchase 140 armored vehicles from Force Protection (NASDAQ: FRPT) for use in Iraq and Afghanistan, according to the Associated Press.
India's Reliance Retail has won the exclusive marketing and distribution rights for Apple (NASDAQ: AAPL) stores in India. The first Apple-owned store in India is scheduled to open at the end of this month, reported the Economic Times.
MOST NOTEWORTHY: Cypress Bioscience, Banc of America, Insulet, Taleo and Vocus Inc were today's noteworthy initiations:
Friedman Billings started shares of Cypress Biosciences Inc (NASDAQ: CYPB) with an Outperform rating and $22 target, and is positive on the company's lead product milnacipran, in Phase III studies for fibromyalgia. The firm expects a 1Q09 launch and believes the U.S. market could be as large as $7B.
Goldman resumed coverage of Bank of America Corporation (NYSE: BAC) with a Buy rating and $63 target as they believe the company has around $22.5B of unrealized gains in its strategic investment portfolio. Goldman also added BAC to their Americas Buy List.
Insulet Corporation (NASDAQ: PODD) was initiated at William Blair with an Outperform rating. The firm believes the unique features of the OmniPod will allow PODD to capture a meaningful portion of the 300,000 current insulin pumpers in the United States.
Soleil started shares of Taleo Corporation (NASDAQ: TLEO) with a Buy rating and $35 target and believes the company's recent growth pace can continue.
Shares of Vocus Inc (NASDAQ: VOCS) were also initiated at Soleil with a Buy rating and $39 target. The firm believes the company can gain share in the early stage market for public relations software given its on-demand model and low price entry point.
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