Lions Gate Reports Terrible Earnings - Then Soars 10%

Lions Gate Entertainment LGF released its fiscal Q3 earnings results after the closing bell on Thursday. The company, which noted investor Carl Icahn unsuccessfully attempted to acquire last year, reported a net loss of $1.7 million or $0.01 per share, compared to a loss of $6 million or $0.04, in the year ago period. The top-line results came in well below Wall Street consensus EPS estimates of $0.09 per share. Not good. Revenues at the company were down 44.8% to $323.03 million versus $422.91 million in last year's corresponding quarter. The lower revenue was primarily attributable to the fact that LGF did not have any major theatrical releases in the quarter. Nevertheless, the top line number still missed Street revenue estimates of $358.78 million by a fairly wide margin. Not surprisingly, LGF shares immediately fell after the earnings numbers were released, although the move was on very thin volume. At its worst levels, the stock was down roughly 8% in the after hours. What was surprising, to me at least, was that the stock quickly bounced back despite the ugly earnings. Even more surprising, LGF has rocketed higher on Friday, adding 10% to $12.14 - giving the stock a gain of more than 43% already in 2012. Obviously, the market was not reacting to the company's quarterly report, so what is going on in Lions Gate? Quite a bit, actually. On January 13, 2012 Lions Gate announced that it was acquiring Summit Entertainment, another large Hollywood independent studio, for $412.5 million in cash and stock. The deal gives LGF the last installment of the "Twilight" series and library rights to the first four uber-successful teen vampire films. The deal is expected to be accretive to LGF's fourth quarter and year end financial results. Looking at LGF's chart, it is clear that the Summit deal has been a major catalyst as the shares have been headed pretty much straight up since this transaction was announced last month. The acquisition of Summit and the "Twilight" series, however, is not the only catalyst for LGF. The studio will be producing a series of films based on a blockbuster teen sci-fi book trilogy called "Hunger Games." Apparently, this is a really big deal, and the market is starting to wake up to this realization. Michael Comeau over at Minyanville does an awesome job of explaining the significance of "Hunger Games." According to a poll done at EntertainmentWeekly.com, the film is the most anticipated release of 2012. Comeau writes, "you can't find a 'Most Anticipated Movies of 2012' list without The Hunger Games being at the top of it -- yet adults have seemed conspiculously unaware of its likely popularity." I, for one, had never heard of "Hunger Games" and only recently noticed the strange activity in Lions Gate stock. Comeau goes on to argue that as a result of building anticipation over the movie, "Lions Gate is the momentum/fad trade for this part of the year," and compares the catalyst to what Guitar Hero did for Activision ATVI in 2006. At this point, it is very hard to argue with him - the stock is skyrocketing the day after a terrible earnings report and is up more than $4 since the end of December. Lions Gate CEO Jon Feltheimer acknowledged the interesting set of catalysts for the company in a statement which accompanied LGF's earnings release. He said, "The February 11 home entertainment release of Twilight Saga Breaking Dawn 1, the March 23 theatrical release of Hunger Games and the November 16 theatrical release of Twilight Saga Breaking Dawn 2 lead a strong combined slate that we believe will enable us to deliver increased consistency, profitability and value to our shareholders." Furthermore, Comeau is pointing to February 22 as an "underrated near-term catalyst for the stock." On that date, advance tickets for "Hunger Games" will go on sale. He writes, "I fully expect to see news reports of kids camping out to get tickets, and subsequently, I see Wall Street estimates for box-office receipts skyrocketing." Analysts also continue to back the story. This morning Miller Tabak analyst David Joyce released a note recommending that investors buy the stock on any weakness today. While the name opened slightly lower, the "weakness" lasted all of 8 minutes before LGF turned positive and started to run higher. While Joyce recommended that clients buy LGF on weakness, it should be noted that after today's 10% surge, the stock is now trading above his $12.00 price target. Last year, the fight between Lions Gate and Carl Icahn got a lot of coverage in the financial media as the investor's play for the company got acrimonious. Lions Gate Vice-Chairman of the Board Michael Burns repeatedly said publicly that Icahn's highest offer of $7.50 per share substantially undervalued the company despite the fact that the stock had traded well below that level before Icahn began circling. With shares trading at over $12.00 on Friday, it would appear that Burns was right - and that Icahn's eye for value is still sharp at 75 years of age. Unfortunately for Carl, however, he isn't profiting from the run-up in the stock as he sold his entire stake, which accounted for around one third of the company, after failing in his more than two-year battle to acquire all of Lions Gate.