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Will 'Divergent' Be the Next Catalyst for Lions Gate?

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The company is hoping that its adaptation of this bestselling young-adult novel can become another 'Hunger Games.'

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From 2008-2011, the share price of Lions Gate Entertainment (NYSE:LGF) remained persistently stuck around the $5 to $7 range. Then, The Hunger Games, the company's $687 million worldwide box office phenomenon, came along and lifted the stock into the mid-teens.

With the box office strength of The Hunger Games and the final installment of another young adult book-to-movie adaptation, Twilight, Lions Gate has powered right up near the $20 mark in the past week.

With the enormously lucrative Twilight franchise now in the rear-view mirror, Lions Gate has moved swiftly to find the next big teen girl-friendly movie franchise to complement The Hunger Games. The company is placing its bets on an adaptation of Divergent, a popular new young adult book by Veronica Roth.

Divergent closely follows the winning formula of The Hunger Games series: A strong young female heroine struggles to earn her freedom in an oppressive, dystopian society (and meets a hot guy or two along the way, of course). Rising Hollywood actress Shailene Woodley, who will also appear as Mary Jane in upcoming Spiderman sequels from Sony (NYSE:SNE), will headline the cast. Kate Winslet is also part of the cast, adding star power and awards credibility to the production.

"We're putting it out to our fans right now that we think this is the next big franchise," Lions Gate CEO Jon Feltheimer said last fall, according to The Wrap, adding that the movie will be a hit because it has a passionate fan base. Divergent is scheduled for released on March 21, 2014, the same period of the year when The Hunger Games broke out in 2012.

"By putting it, frankly, in the original Hunger Games time slot, we're indicating the amount of support we have," said Feltheimer.

Speaking on a third-quarter earnings call this week, Feltheimer reiterated his confidence in what the company hopes will become another Twilight-esque golden goose.

"Book sales of the Divergent franchise are approaching the 3 million mark and continue to compare favorably to The Hunger Games and Twilight franchises at a similar point in their trajectory," said Feltheimer, according to transcript provided by Seeking Alpha.

With the release date still over a year away, it's anyone's guess how Divergent will perform sales-wise.

"Nothing is ever guaranteed in the film business of course, but I think Lions Gate feels that Divergent has ingredients that give it an opportunity to pursue franchise success," James Goss, a senior media analyst at Barrington Research, told Minyanville.

Even if Divergent does not become a breakout success, Goss said that Lions Gate still "has a slate of films that can produce decent results with low risk," such as this month's modestly-budgeted chart-topping zombie film, Warm Bodies. The company "is more than just big movie franchises," he added, pointing out the success of Lions Gate's TV developments, such as AMC's (NASDAQ:AMCX) Mad Men and FX's (NASDAQ:NWSA) Anger Management.

Box office experts seem to be fairly optimistic about Divergent's prospects, at least according to the Hollywood Stock Exchange, a site where users "bet" on the box office performance of upcoming movies by buying and selling them as though they were shares. The site has emerged over the years as one of the leading box office predictors, and there, Divergent is already priced at a relatively strong $50.66. That means that users expect the movie to earn some $50 million in its first four weeks of wide release, and there's plenty of time for its "share price" to increase as hype and awareness of the movie grow. The movie looks especially strong compared to the share price of The Host, a new young-adult movie based on a book by Twilight author Stephenie Meyer. Mere weeks from its release, The Host is priced only at $47.23.

Analysts at RBC Capital were also upbeat about the potential of Divergent, having raised their price target on Lions Gate this week to $21 from $18, citing "the possibility that its Divergent film could cause investors to value the company more as a multiple of EBITDA than as a sum of its parts." The bank has an Outperform rating on the stock.

Twitter: @sterlingwong
No positions in stocks mentioned.
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