Don't Panic Over Lionsgate's Plunge

Image source: Lionsgate

Last weekend, I was impressed when The Hunger Games: Catching Fire effectively propelled itself into the record books with the highest-ever November debut.

And though Lionsgate initially estimated total weekend sales for the big-budget sequel of more than $161 million, the film's actual gross was adjusted down to "only" $158.1 million when the final tickets were tallied. Even so, that easily trumped the previous November weekend record of $142.8 million held by 2009's The Twilight Saga: New Moon.

In addition, Catching Fire currently boasts the sixth-largest opening weekend of all time, just trailing the $158.4 million earned by The Dark Knight in 2008, and well ahead of the $152.5 million garnered by first Hunger Games film last year.

Here's what happened
So why, then, did Lionsgate stock plunge more than 10% Monday?

First, remember some estimates pegged Catching Fire's weekend debut at around $175 million. For reference, that would have secured for it the second-highest opening weekend of all time, right between two of Disney's comic book-inspired blockbusters in Iron Man 3 and Marvel's The Avengers. Of course, that would have also been great for Catching Fire, considering Iron Man 3 and The Avengers earned more than $1.2 billion and $1.5 billion, respectively, during their own worldwide theatrical runs.

Instead, fickle profit-takers grabbed the reins Monday when Catching Fire fell short of Wall Street's unrealistic expectations, taking advantage of the fact shares of Lionsgate had already more than doubled year-to-date going into the release.

Here why the sky isn't falling
Taking a quick look at the stock, while shares of Lionsgate don't look particularly cheap at 21 times last year's earnings, they're also trading around 20 times next year's estimated earnings. In short, investors are left wondering where Lionsgate's growth will come from if Catching Fire can't deliver.

Putting aside the fact Lionsgate also has a burgeoning television business -- including massively popular shows such as Mad Men, Weeds, Nurse Jackie, Nashville, and Orange is the New Black -- there are a number of reasons I think Catching Fire is being underestimated at this point.

Image source: Lionsgate

On the surface, though, I'll admit some of those worries seem legitimate. After all, Catching Fire only just beat The Hunger Games' domestic opening weekend number from last year. So, the thinking goes, there's little reason to believe it can significantly outperform the first film's $691 million total when all is said and done. What's more, Lionsgate did spend $130 million to produce the second film, compared with just $78 million for the first.

It stands to reason, then, the second film may not prove all that much more profitable for Lionsgate ... right?

Wrong.

In fact, I'm still standing by my previous assertion Catching Fire has a great chance of exceeding the $1 billion sales mark over its entire theatrical run. How can it get there?

First, note that Catching Fire already turned in roughly $146.6 million from international movie-goers in its first weekend, or a 147% increase over the $59.25 million The Hunger Games earned overseas in its own debut. Keeping in mind The Hunger Games earned a respectable $283.2 million internationally last year -- and assuming Catching Fire can maintain its current global momentum going forward -- that means Catching Fire could tally as much as $700 million from overseas audiences alone.

That may sound like a lot, but remember Disney's Iron Man 3 garnered more than $800 million overseas, compared with just $311 million for Iron Man 2.

Sure, it's an entirely different franchise, but I see no reason that can't happen, especially since Catching Fire is also benefiting from positive word of mouth thanks to receiving a rare "A" Cinemascore by polled audiences.

What's more, fans around the world are also increasingly enamored by the film's namesake books in Suzanne Collins' The Hunger Games trilogy. In fact, last August, Amazon.com announced The Hunger Games had surpassed even J.K. Rowling's Harry Potter series as its best-selling book series of all time -- no small feat, considering Harry Potter not only has seven books to The Hunger Games' three, but that it also happened only four years after the Hunger Games trilogy's release.

Finally, don't forget Lionsgate investors should also benefit from the studios' decision to split the third book of the trilogy into two parts, with the first slated to hit theaters this time next year, and the second in November 2015. Then there's merchandising, TV distribution, and physical and digital media sales down the road. 

All things considered, that's why Lionsgate shareholders can rest assured there exists no reason to panic. To the contrary, I think the recent pullback provides the perfect buying opportunity for patient, long-term investors.