March 26, 2012 at 3:02 PM ET
As countless reviewers have pointed out, teenagers killing each other in a futuristic gladiatorial arena doesn't sound like promising blockbuster material. Boy, were they wrong.
The first installment of "The Hunger Games," based on the first novel of a trilogy by author Suzanne Collins, surpassed expectations with an opening weekend take of $155 million in the United States. Analysts say the blockbuster has catapulted Lions Gate Entertainment Corp. into the big leagues, raising both the studio's profile and the stakes for its future projects.
Investors were as excited as moviegoers, with the stock up more than 4 percent at $15.16 by midafternoon Monday. "It bodes well for the overall performance of the first film and it bodes extremely well for the prospects of the rest of the movies they plan to produce," Marla Backer, managing director at Hudson Square Research, said.
To a certain extent, an expectation of success was already baked into the share price, which had been on an upward trajectory thanks to pre-release buzz about the movie. But $155 million blew the doors off even the most optimistic projections. J.P. Morgan, which predicted a $120 million to $130 million opening weekend, raised its estimates and set a price target of $18 by December. In a research note, analyst Monica DiCenso called the franchise "transformative" for Lions Gate.
How well the movie does this coming weekend will affect investor sentiment. "If it holds well in its second weekend, then the stock should continue to advance," Doug Creutz, analyst at Cowen & Co., said via email.
Some think this is likely. "Original movies tend to hold better than sequels," Matthew Harrigan, an senior analyst at Wunderlich Securities, said. Harrigan predicted many fans will see the movie again and said next weekend is likely to include a wave of adult moviegoers who sat out the opening weekend's teen fan frenzy. The movie's second weekend "could be another $90 million," he said.
A broader effect of "The Hunger Games" is that more investors are now looking at Lions Gate's entire portfolio and liking what they see, analysts say. "I think there are a lot of people looking at the company now with fresh eyes," Backer said.
In a CNBC interview Monday, DiCenso pointed out that Lions Gate has relied on sequels for some time with franchises like Tyler Perry and "Saw" and predicted a more aggressive expansion of this strategy.
"What you see now when you look at their slate is a significantly expanded franchise slate," she said. In addition to TV hits like "Mad Men," which its television division produces, Lions Gate also acquired Summit Entertainment this year. Summit is the studio behind the blockbuster "Twilight" franchise, the final installment of which is scheduled to be released this year.
The flip side of "The Hunger Games'" huge initial success is that the stakes are much higher for the remaining three movies planned for the series. (Like the "Harry Potter" franchise and "Twilight," the final book in the trilogy is being split into two films.) The movie was made for a relatively modest $80 million and promoted for $45 million, but analysts say the sequels will probably have bigger production and marketing budgets.
While the record for the biggest opening weekend still goes to "Harry Potter and the Deathly Hallows: Part 2," the final movie in the Potter series, analysts say Hunger Games is much more important to Lions Gate than the boy wizard was to Warner Bros. and parent company Time Warner.
"Remember, Time Warner is a company with a market cap of $41 billion and $52 billion in enterprise value," Alan Gould, entertainment analyst Evercore Partners, said. "Harry Potter was great… but it didn't move the needle that much for a company the size of Time Warner."
By contrast, Gould said Lions Gate's enterprise value is around $2.5 billion, and some analysts predict that the Hunger Games franchise could generate $1.5 billion in profit. Enterprise value is a broader measure of a company's value that includes market capitalization plus debt, preferred shares and minority interest, minus cash and cash equivalents.
"This is going to be their baby for a long time," Backer said.