Clearing out Small Positions (IMAX, LGF)

As time goes by I'm finding it harder to grasp -- and so I'm making a move to save a little bit of it. I've decided to clear some of the smaller positions out of my portfolio.

Essentially, any holding that makes up less than two percent of my portfolio has been put on notice -- if it's not something I'm actively looking to buy more shares of, I'm going to sell the few shares I do own.

To some extent this is a natural outcome of my hyper-diversified portfolio, and of my strategy of usually buying shares in fairly small clumps as I build a position. In most cases, I'll buy a few shares to open a position, then research the company more over the ensuing months and look for opportunities to fill out the position over time.

But sometimes, that first position I buy turns out to be either a mistake, or not as interesting as I thought it would be. In those cases, I'm usually very reluctant to sell these small positions because I want to wait for more information ... which means I get a huge number of small positions building up in my portfolio, all competing for my attention and demanding a certain amount of effort as I track the news and earnings information about these firms.

But life is growing more complicated and there are always interesting new purchase ideas in the back of my mind, so I'm going to focus on being a little quicker to make decisions about these companies that I've taken a small position in and then left to wither.

Two companies that I've actually bought and sold before meet this criteria today: They are small positions, each not much more than 1% of my portfolio, and I'm not interested in buying shares right now. So I'm selling Imax (IMAX) and Lionsgate (LGF).

I don't have strong negative feelings about either of these companies, but neither am I interested enough to buy more ... and there's no point in paying close attention to these in exchange for what is likely to be very limited upside (at least to me, since these are small positions).

Imax has been in a reasonably decent recovery over the last few months, though it has come down about 10% from the recent high near $5.50. I still think the shares are undervalued here, but I don't have enough conviction to buy more and make it worth my while. My primary concern is the company management, which has so far failed to meet reporting standards and mismanaged a "strategic partner" search process. It's quite possible that the big screen company will prosper -- they're certainly doing well with hit films so far this year -- but in order to really thrive they're going to have to expand their base significantly, which is likely to take quite a long time at this rate. They believed that they needed a partnership or a buyer who could push their growth, and I'm inclined to agree -- but with the lack of interest in theater companies right now, I don't know that they'll get it at a fair price. Even Cinemark (CNK), the big international cinema operator which came public just last month, has received a fairly tepid response in the market.

And Lionsgate is, though steadier and more profitable, also unlikely to make any big moves soon. While it's interesting to hold this one and watch to see which of their films are hits and which bomb, it's not interesting enough to make it worth my while. Carl Icahn is still holding shares in this one, though it doesn't appear that he has bought any in quite some time or made any activist overtures toward the company of late, so there's certainly ample reason to hold the shares here. My primary concern is that the shares are a little too expensive to buy, considering the growth rate they've shown over the past two years, and I simply no longer own enough shares to make it worth my while.

These decisions are very personal ones relating to my portfolio composition, so I wouldn't argue that anyone else should consider selling these companies -- I might look back and regret this, but for sanity's sake I need to focus my attention on my filling out positions that I feel more strongly positive about.

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Blood and Guts on your Ipod (LGF)

Lionsgate Entertainment (LGF), a company I've held shares in for a while without much movement, had a few interesting pieces of news out today.

The first, is that they're finally (after "hinting" about it many months ago in a conference call) going to have their films available on iTunes. So those who want to watch the films from the Saw franchise, which has grossed close to $500 million at the box office in three installments, can now do so in the privacy of their own iPod. It remains to be seen if it's more disgusting on the tiny screen than it is in the multiplex.

And the second is that Lionsgate, perhaps in a related move, raised its forecasts slightly for the year. The earnings for last year, released last week, were slightly disappointing -- more or less in line with analyst estimates, which is about all you can hope for from an entertainment company that didn't have any surprise breakout hits last year.

The shares still aren't particularly cheap, at a trailing PE of about 50 and a forward PE of about 25, but if you look at cash flow instead the shares are getting more reasonable -- going with their new estimates, the shares now trade at an enterprise value (over $1.5 billion thanks to a fair amount of debt) to free cash flow (projected at $100 million this year) ratio of about 15. That's still above what private equity folks are likely to want to see in their investments, so I'm not arguing that the shares are cheap or primed for a buyout, but they're getting more reasonable.

Investing in Lionsgate continues to be a bet on a few things:

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First, their library of filmed entertainment is now one of the strongest in the industry -- they've opened up another distribution channel with their iTunes deal that may help them to monetize this library, but any investors in the company, myself included, now are counting on continued deals like this for internet delivery, video on demand, and next generation DVDs to boost value. If you believe that "content is king", Lionsgate should have a great future.

Second, Lionsgate is developing into one of the more important studios in Hollywood -- if they can continue developing niche films that are profitable, they should be able to count on a much steadier earnings profile over time. Unlike most studios, they don't plan their year around one or two "tentpole" event films that they hope will become blockbusters and prop up all their unprofitable ventures ... instead, they focus on buying and developing inexpensive films, without massive marketing budgets, that appeal to niche audiences and have a very solid chance of profitability (with a few breakout hits in there, odds willing, to spice things up). Another Oscar win as with Crash, or another hugely profitable franchise like Saw, could be just around the corner (or not).

And third, of course, is the potential for a buyout to rapidly monetize the value of the library. Richard Dorfman had an interesting note last Spring on Carl Icahn's investment in the company, and the potential for the shares. He has a good analysis of why film libraries are valuable, and also notes the earlier sales of MGM and the Dreamworks library as potential indicators of the outsize value locked up in Lionsgate's library. I don't know if Icahn has been working on this at all in recent months, he's clearly been focused on other things, but according to the filings I've seen he still owns about 4% of the company [update -- this is confirmed by the 2/14 filing from Icahn Management, no change in his LGF holdings] ... and there are some big chunks held by institutional investors, including the American Funds folks with about 10% among others, so it's certainly possible that something could develop fairly quickly along these lines.

And as a small aside, it's always possible that they'll make some money off of their investment in Image Entertainment -- they tried and failed to take the company over, including a proxy fight that they lost last fall, but they still own (as of the last filings I've seen) close to 20% of the company. The company has been awful for quite a while, but there DVD distribution business is a good fit with Lionsgate, so we'll see if any value ever comes from that.

This remains an interesting story for me -- a company with weak but slowly improving financials, that is widely understood to own significantly undervalued assets. Unfortunately, since these assets are films, and valuing them depends on your guess about future distribution streams for older movies, the valuation is far from definitive and any unlocking of that value will probably depend on an outside buyer unless you have the patience to wait for the company to grow, through current film and TV production and new distribution streams, into a stronger operating business. That does seem to be happening, but absent a string of surprising hits in the near future it's likely to take a while.

disclosure: I sold a small portion of my LGF holdings back in August, but continue to hold shares and don't plan to buy or sell in the near future.

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Takeover or Blockbuster? (LGF)

It's been a strange couple of months for Lionsgate (LGF), the film and TV studio/library known for slasher hits like Saw, indy film successes like Crash, and a huge library of filmed entertainment of all kinds.

It started with the solid but unspectacular quarterly earnings announcement at the beginning of August -- the quarter itself was pretty weak, with not much in the way of TV deliveries or box office hits, thanks to the weakness of Akeelah and the Bee, but they still beat the analysts' number, thanks to lower costs.

And the outlook was very good -- nine prime time series on the slate for this fall, and several solid films scheduled and on track, including Saw III for Halloween.

So that quarterly release didn't do much for the LGF ticker, though in the weeks since then it steadily moved up roughly 10% to where the shares now stand. Why?

Well, first we had an interesting leak during the conference call -- LGF execs let slip that at least some of their film library would be available on iTunes, before Apple had acknowledged the open secret that iTunes would be used to sell movies (though LGF didn't end up being part of the initial Apple announced rollout, according to Frank Barnako).

And then the corporate raider actions began. When I first heard that Lionsgate was involved in an activist shareholder fight, my initial assumption was that it was one of LGF's shareholders ... the name that first came to mind was Carl Icahn, who as of his last SEC filing in August still held a bit over four million shares, which is in the neighborhood of a 4% stake.

But it wasn't Icahn agitating for Lionsgate to sell its film library or put the company up for sale, which is what many folks have expected since his holdings were made public in the Spring.

No, it was LGF agitating for a new board at Image Entertainment (DISK), a DVD distributor that they own part of and have tried a couple times over the past year to take over (first with stock, then with cash). Image has rebuffed LGF and has been searching recently for "strategic alternatives" (not unlike Imax's recent disastrous search), but Lionsgate has accused them of severely bungling that process. Lionsgate continues to have an offer on the table for Image shares even as Image accuses them of artificially depressing their shares and attempting a hostile takeover (AP story on that here).

This is exhausting.

There is certainly a solid argument to be made that LGF and DISK make a good pair -- a company with a huge film library, and a distributor that can get those DVDs to retailers. But I don't know that bringing the troubled Image Entertainment into their stable will help Lionsgate much in the near term, and it doesn't seem likely that this fight, though it has certainly kept LGF in the news, would bring their shares up -- on the contrary, we'd generally expect a takeover fight to depress the shares of the potential acquirer.

So what has moved the shares? Well, SG Cowen upgraded LGF last Friday, which helped a bit -- the analyst said he thought that film revenues would continue to beat expectations, but that more conservative spending by management would (for a change) allow them to beat the earnings expectations as well, on the back of a good film slate for the coming year. He singled out Jessica Simpson's Employee of the Month as well as Saw III and some other upcoming releases as bright spots. That upgrade brought a new 52 week high, though today a downgrade from Sanders Morris took a little back.

So perhaps the fact that we're getting close to another few film releases is really what has helped LGF keep up with the ebullient market this month. After all, Jessica Simpson and Dane Cook have managed to get themselves on the cover of plenty of magazines with their on-set-romance rumors -- rumors that they recently tried to put to rest just in time for the Employee of the Month premiere. Maybe fans will flock to the flick just to see if the sparks really flew.

Either that, or investors are really excited about the hordes who are likely to flock to Saw III in a month to see if the blood really flies.

But I don't really know.

I continue to be amazed at LGF's resilience, and that's a big part of the reason that I still like the company. As I've picked up shares over the past year and a half I've looked forward optimistically to lots of potential hit films -- Lord of War, In the Mix, and Akeelah and the Bee among them -- and most of them have flopped. LGF has had disappointment after disapointment in most of the recent films that fall outside their two biggest current franchises: Tyler Perry (Madea's Family Reunion, etc.), and horror (Hostel, Saw).

But still, they keep churning out the films and TV shows, and making money on many of them even as they lack blockbuster hits, and the library continues to grow.

So I officially resign from the job of trying to pick which of Lionsgate's myriad offerings will find an audience ... I'll just resign myself to the knowledge that as long as the productions keep coming fast and furious, and they continue to keep costs low, it doesn't take many hits to make for a good year. Even consistently mediocre performance, by Hollywood standards (ie, no $100 million box office results), can be quite profitable.

And even a bad year could always bring a buyout. Lionsgate has itself been the subject of takeover, sale or breakup rumours for years, thanks to the value of its huge film library -- Icahn certainly stoked those rumours when his funds took a stake, and every few months someone publishes a new story bringing up the value of LGF's library (in July it was CNN/Money). I've written plenty about this before, with an update on a recent library acquisition here, and more thoughts on the company's strategy here.

I sold some of my shares before this latest move up as part of a move to reduce my margin exposure, but I still like the company and continue to hold a position with the knowledge that I might need to be very patient. Whether a good season of films, some television hits, or a takeover is the final inspiration, the fuel for a rise in Lionsgate shares remains in the stock ... but it has been there for years, with no guarantee that the fuse will be lit at any given time, or ever.

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Dropping some Lionsgate (LGF)

As a continuation of my across-the-board selling to reduce margin exposure, I've sold the portion of my Lionsgate (LGF) holdings that were held in a margin account (roughly half of my overall LGF position).

I mentioned the criteria I considered for this broad selling when I posted earlier, and I've sold a fair number of stocks today. So why Lionsgate?

Well, I like LGF the company quite a lot -- I think it's very well run, and I like their strategy of producing lower cost niche films and developing a large and valuable film and tv library that should increase in value as distribution of the "long tail" grows for filmed content.

But I don't think there's any one thing in the next six months that's going to move LGF markedly -- this is a longer term play, which might possibly result in a takeover within the next several years. The company is not particularly hit driven, so while the Saw III release this fall should help their bottom line, it won't markedly impact earnings.

And as long as I'm whittling down positions to reduce my exposure to expensive margin loans, it's hard to justify holding on to a company that I believe will do well in the long term, but is at least as likely to dip on a bad film than to climb on a good one. Much as I did with IMAX, which is in a similar business, I'm holding on to my non-margined shares of Lionsgate and I continue to believe it's a good play for the very long term (3-5 years), but I don't feel confident enough in any near term catalysts to make it worthwhile to hold on to this smallish position with borrowed money.

So I sold about half of my LGF position today at $9.28, a small loss of about 7% from my purchase at an average cost of close to $10. I continue to hold on to the remainder of my LGF position at an average cost of about $10.47. Some of my other recent thinking about Lionsgate, and my rationale for buying the shares initially and holding them to this point, is available here.

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Lionsgate Library Grows (LGF)

Lionsgate (LGF), regardless of the takeover rumors that continue to swirl around them, continues to go about their business of growing a large, low cost film and television library and production company.

Their films have not done particularly well this Spring, including their inaugural partnership with Starbucks for Akeelah and the Bee (they might sell more DVDs at Starbucks this Summer than they did tickets at the box office, unfortunately).

But they continue to stick to what makes them different -- building a big library of valuable programming that should increase in value as distribution becomes more and more streamlined, and continuing to produce films and television programs that stand out from the crowd, appeal to niche audiences ... and are cheap.

And now we're getting more of the same.

The biggest news is that Lionsgate is acquiring distribution rights to a large library from Studio Canal, about 2,000 titles. LGF already owns some rights to some of these films, but will now have stronger tv, internet, DVD and VOD rights for the collection -- a collection that includes several French classics as well as Evil Dead 2 ... quite an eclectic mix.

Lionsgate has called its library the "jewel in its crown", and that's certainly been the sentiment on Wall Street as well, as takeover rumors generally are based on the value of the library (5,000+ titles) more than anything else. I think most people feel, as I do, that there's going to be a significant opportunity for profit for content owners as distribution becomes easier, more widely available, and faster online and through new cable VOD offerings.

One of the ways Lionsgate is pushing this forward, aside from building their library, is by helping to build distribution networks. One of those, CinemaNow, was the source of another bit of news this week. CinemaNow is a Lionsgate-supported company that's focused on online distribution of films, and they have now signed up Echostar as a big new investor, along with some venture capitalists and tech firms (including Cisco). I was especially pleased to see Echostar sign up to support this venture, since along with cash they bring 12 million Dish Network subscribers. It's a good partnership, since the satellite TV companies are desperate to find ways to deliver more content than their relatively narrow bandwidth can carry (Dish can't provide the hundreds of VOD titles that cable is capable of), so I see here another great opportunity to build more audience for Lionsgate's titles.

And their efforts to fill these distribution channels with their own productions are continuing apace, as well ... and they continue to illustrate the wildly broad range of work going on under the Lionsgate banner.

My favorites, from just this week? Deliver us from Evil, a controversial award-winning documentary about sex scandals in the Catholic Church was bought by Lionsgate and will be released this Fall ...

And I Pity The Fool, Mr. T's new show, will premiere on TV Land in October. Seriously. Mr. T does an advice show, including live online video chat with the T himself, described quite seriously in the press release as still the #1 Jibber Jabber Attacker.

Even if I didn't like the financial prospects of the company -- and I do -- I think I'd want to be involved in any company that's making this kind of material available to the world.

If you can't get enough Lionsgate info, I wrote about them a while back when I heard an interesting interview with Michael Burns that got into the philosophy and finances of the company, and when I bought more (at not the best price, unfortunately) in the leadup to Akeelah and the Bee.

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Not Entertaining Enough (DWA, MVL, IMAX, LGF)

I sold my small position in Dreamworks Animation (DWA) this morning, offloading the shares at $23.25 for a loss of about 35% (average purchase price was about $35, I unfortunately bought shares over a year ago, before and during the Shrek 2 DVD fiasco.

This represents a significant change of heart from my last note about DWA, back in December -- at that time I thought 2006 would be a buying opportunity as we await 2007's Shrek the Third and Jerry Seinfeld's Bee Story film, then Jack Black's Kung Fu Panda and maybe a Puss-in-Boots movie in 2008.

That's still entirely possible, and several analysts see it that way. But after taking a closer look at my portfolio I've decided that I'm uncomfortable with the size and scope of my basket of entertainment stocks. I also own shares in Imax (IMAX) , Lionsgate (LGF) , and Marvel Entertainment (MVL) and I've decided both that I've got too much hit-reliance and entertainment in my portfolio, and that I prefer the other three over Dreamworks. DWA was also the smallest position in this group, so this move also helps with my effort to consolidate and focus more of my time and energy on my larger holdings.

But the size of the position wasn't enough of a reason to sell it -- each of those three entertainment companies has a more compelling upside, I think, than does Dreamworks, though it's also possible that they are also higher risk.

I'm a little concerned about Imax given their very poor luck at choosing their first two films this year (V for Vendetta and Poseidon were tough on them), but I see potential catalysts in the Superman movie and, more importantly, in their possible acquisition or reinvigoration in partnership with someone. That's a large part of the reason I prefer holding IMAX to DWA -- I'm waiting to see what happens as the company "explores its options" with regard to a possible tighter partnership with a big studio or an outright sale of the operation.

Lionsgate, likewise, had a rough Spring -- its highest profile film was the Starbucks-partnered Akeelah and the Bee, which never was able to capitalize on the feel-good word-of-mouth marketing from Starbucks and break through into the public consciousness. Still, Lionsgate has a few things going for them that Dreamworks does not -- they have a huge film library that makes them a very enticing acquisition target if all else fails; they have several franchises that are very profitable (Saw, Tyler Perry); and they have a corporate commitment to profitability, not hitmaking -- they're willing to make or release anything for film or TV as long as they think they can make it profitable, they don't rely on "winning the weekend" for each of their releases (though their low-cost horror and "urban" films have occasionally done just that). This seems a safer bet, and more compelling opportunities for profit, than a hit-reliant animation studio that has so far had trouble even turning hits into profit (which makes me quite nervous about the impact a serious flop would have on DWA).

And finally Marvel ... as a kid who grew up reading Spiderman and X-Men comics I may be simply letting nostalgia firm up MVL's place in my portfolio -- but I don't think so. What I like about Marvel at this point is just the same thing that some, including Jim Cramer, don't like -- they're adding more risk and greater potential reward to their business plan.

Marvel, like Dreamworks, is hit-driven. It was Avi Arad's work to build Hollywood franchises for X-Men and Spiderman that allowed the company to recover and attain profitability over the past several years, and it will be successful films and similar entertainment properties that drive the bus forward. I very much like that Marvel has chosen to continue with their licensed film production -- which will build on the monster hit X-Men 3 to bring us Spiderman 3 next year, and a Wolverine film probably by 2008 -- but to also build a parallel production capacity to bring more Marvel heroes to the silver screen.

This will mean more risk, as Marvel has entered into a $500 million financing agreement to put these films together starting in 2008, but it will also mean much more reward if they can continue building hits based on more of their characters -- instead of a few percentage points of the gross like they get with their older deals for X-Men and Spidey, they'll be pocketing all the profit after paying off debt and covering Paramount's distribution fees. Of course, that means that if the films flop or fail to pay off the debt nut, they'll be in trouble -- but the company will survive, thanks to what I think is very clever non-recourse financing that puts up only the characters themselves as collateral. A flop of a film will mean, if Marvel can't pay the bank, that they lose the right to make any more movies with that character -- that seems fair to me.

The two things that make me a little nervous about Marvel are their penchant for adding debt right now for no good reason (they're borrowing money to buy back shares, which seems foolish to me -- much less sensible than borrowing money to make movies), and the changing nature of their relationship with Avi Arad. Avi was the one who brought Marvel to Hollywood and made it work, but now he's moved on to create his own independent production company that will subcontract to product Marvel's films. This is fine if it just means he has more time to focus on the films, but I'm not crazy about adding another middle man company that will siphon off a bit more profit from Marvel. Avi has done great things for Marvel, but he's also the one who put together the laughable Nick Fury film with David Hasselhof a number of years ago, so he's not infallible.

So four stocks, among which Marvel is the only one I'm holding at a paper profit right now, and I'm offloading one. It should be an interesting couple of years (or months, even) for some of these companies as hits emerge and recede, takeovers are rumored or offered for Imax and Lionsgate, the DVD format war heats up, and online and cable film offerings become more and more flexible and, hopefully, create new revenue streams for Marvel and Lionsgate.

Dreamworks Animation may well have a very good 2007 at the box office, but I'm not convinced that they'll profit from it or that they'll be able to stand out in an increasingly competitive animation landscape. I could very well be wrong, but right now I'm more confident in the prospects for my other entertainment holdings.

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Movie Investing Blahs (IMAX, LGF, MVL, DWA)

The movie industry investments in my portfolio have been a bit disappointing of late ... weak box office and dragging financial results from Lionsgate and Imax are causing a small sector of red in my portfolio.

I'm standing by these companies at the moment, but they're not making me stand up and cheer just yet.

I was clearly a little too optimistic about Lionsgate Entertainment (LGF) and their push to copromote Akeelah and the Bee with Starbucks. It looks like even the might of Starbucks couldn't pull this one anywhere near the top of the box office standings, and I can vouch for the fact that they definitely tried -- every Starbucks I've seen in the last month from DC to California has been plastered with spelling bee paraphernalia and Akeelah soundtrack CDs.

It' s still possible that this will build into a word-of-mouth hit as it hits more theaters around the country, but with the marketing push from Starbucks I definitely expected a bigger splash ... and with the notorious impaticience of theater owners I don't imagine Akeelah will keep its theater slots for long if performance doesn't turn around quick.

Now that's definitely not going to sink Lionsgate -- they can have a few stinkers every year and still do well, and I think Saw III and the next Tyler Perry movie will be successful, along with some films that will come out of the woodwork to make money. Lionsgate isn't built on megablockbusters, as I've written before, and in the long run I think this dip on weak Akeelah news might be another buying opportunity.

But it certainly isn't good news if Akeelah really stinks up the joint -- not for Lionsgate, and perhaps even more so not for the Starbucks entertainment division, which is trying to convince Hollywood that they can help build a hit. I'm guessing nobody in Tinseltown is that impressed yet, though that probably won't turn them off their double-skinny-soy-vanilla-mocha-half-caff-lattes.

Imax (IMAX) is another story ... and another one that's a little disappointing. The large format film company has been slowly trending down since they got a pop from announcing that they were looking for partners or buyers to help ramp up growth.

No news on those partners yet, though several folks are reporting that they've got some preliminary offers and are working with some of the more promising ones ... no real timeline I've seen yet.

Performance was a little weak for the first big Hollywood release on Imax this year -- V for Vendetta, which I don't think anyone liked much in the regular theaters, either. Hopefully Poseidon will be a bigger hit next week, but it's a guessing game which of the popcorn movies Imax partners with will actually achieve blockbuster results. Their non-Hollywood film, Deep Sea 3D, apparently did very well, so the core Imax business appears fine.

The Fool had a nice article out on the potential for Imax in moving to digital, so it's nice to see that they're not being left behind on that trend ... and might even make up some ground, since they believe their operators can make a digital transition pay off much faster than conventional theaters can. They also have a good backlog of installations, including many that are underway now and should hit the earnings book soon.

In the short run, though, until we hear about what the company's going to do -- sell themselves, get a well-heeled partner, etc. -- the stock is more likely to trend down than up. I expect they're probably anxious to get some answers, so I think we're likely to hear something in the next month or two and am willing to be patient. But until that happens, Imax is probably just going to drift, regardless of earnings and movie performance ... even Superman, who will be hitting Imax this summer in 3D, may have to wait in line behind the private equity firms and Hollywood titans if he wants to impact IMAX's stock price.

And as for Dreamworks Animation (DWA) and Marvel (MVL), to close out this note on my movie industry investments ... well, in the short term we're going to have to see if people line up for Over the Hedge and XMen 3, respectively, but both of these companies have much stronger film slates in 2007 than 2006 -- so any opening weekend weakness might bring more buying opportunities there, as well.

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Akeelah Buzz -- more LGF

Movies about spelling bees are not necessarily the stuff investing dreams are made of -- one has only to look at the Richard Gere film Bee Season (2005) from last fall to have that clarified (and if you do look at it, you'll be in sparse company ... it only grossed about a million dollars in the U.S. following a blockbuster opening weekend of $120,000 in 21 theaters).

But Akeelah and the Bee, the next Lionsgate Entertainment (LGF) film, should be a very different story.

The star power is probably a wash with Bee Season -- Laurence Fishburne and Angela Bassett are more or less in the same starpower neighborhood as Richard Gere and Juliette Binoche, by my reckoning.

But the marketing machine of Akeelah and the Bee will overwhelm the nonexistent push behind Bee Season, thanks to one word:

Starbucks.

Starbucks has chosen Akeelah and the Bee as the first film in their new push into filmed entertainment, what they're calling "helping our customers discover great movies".

They started expanding into the visual media a few months ago by selling a Laurie Berkner (preschool entertainer) DVD in their stores, which was a big success, and they're now going to be very heavily involved in marketing the theatrical release, DVD, and soundtrack of Akeelah with Lionsgate ... in exchange for a cut of the proceeds, of course.

I think this has the potential to drive a true sleeper hit, if you can consider a film that's being advertised in about 8,300 Starbucks locations around the country a "sleeper." And they're not just putting up movie posters -- no, they're having spelling quizzes in the stores, giving out vocabulary-building cup sleeves, and giving baristas free screenings so they can talk up the film if they like it.

This is an ideal marketing push for a film like this, in my opinion -- a feel good story about an 11 year old from the inner city who goes to the national spelling bee. Not something you can market with special effects or starpower, but by all accounts a powerful story that can build viral buzz if seeded in all the right places ... and every Starbucks in the US will be a seedbed. Oh, and by the way, 2929 Entertainment, a Mark Cuban c ompany, is the other copromoter of this one -- and that's certainly another guy who knows how to come up with new ideas for making money.

This is one reason why I'm adding a bit to my Lionsgate position today. This film won't make or break their year, thanks to a very diversified product offering, but it does exemplify the kind of new thinking, low cost filmmaking and marketing, and creative use of excellent stories that I think make Lionsgate a special company.

For the record, I bought more LGF today at $10.01 -- my Lionsgate investment is still a bit under water, but this purchase brings my average cost per share down to about $10.35.

Previous postings about Lionsgate from the last few months:
Lionsgate Roaring Ahead (LGF)
Oscar Buzz (LGF)
Annual Checkup -- LGF

(and by the way, lest you think I know anything about making predictions in the movie business, I also thought that Wallace and Gromit might be a hit ... oops!)

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Lionsgate Roaring Ahead (LGF)

I listened to an interesting interview yesterday from KCRW's show The Business KCRW_5305402.mp3 (audio/mpeg) with Michael Burns, an executive at Lionsgate Entertainment (NYSE: LGF).

He was entertaining, clearly pleased with the Crash Oscar win against long odds, but also very good at explaining the Lionsgate strategy of targeting low cost, niche markets with readily accessible and targetable audiences. He described LGF's advantage as having a "PT Boat versus an aircraft carrier mentality" in their ability to make decisions and produce films very quickly and efficiently.

The example that he gave was the Tyler Perry deal -- some of the LGF folks brought up the idea of starting a deal with Tyler Perry, who no other studios were really pursuing despite the success of his stage work, and within less than two months they were in preproduction on his first movie, Diary of a Mad Black Woman. They put a few million dollars in to produce that movie, and the two Tyler Perry films have so far brought in well over $100 million in two years.

Something similar happened with Crash, a few Lionsgate employees saw the film at the Toronto Film Festival, loved it and saw and audience, and moved very quickly to close the deal ... and this is the first "acquired movie" in 20 years plus to win the best picture Oscar (as opposed to films that were originated by studios).

They are willing to exploit any niche -- Urban (Tyler Perry, In The Mix), horror (Saw, Hostel), gross-out comedy (Larry the Cable Guy), "grown up Oscar candidate" movies (Monster's Ball or Crash) or controversial movies (Fahrenheit 911 or Hard Candy), to name just a few -- these niches all have ready made audiences who can be relied upon to pay to see the movie, and they are generally cheap to make and to market -- marketing costs will never approach those of blockbuster films, and there will never be Tyler Perry Happy Meals at McDonalds, but as any marketer will tell you, if you can find the right niche to market to and do so inexpensively, you can make money without spending too much money.

He also had a nice quote on Lionsgate's ambitions -- in his words, "we'd like to be the smallest studio with the biggest library." LGF is often rumored to be an acquisition candidate thanks to their massive library of film and television productions that generate a nice reliable income stream -- and recent news of film library acquisitions has accentuated the value of this backfile -- but there's also a good argument to be made for keeping this unique, eclectic producer independent and letting them continue to grow.

I've written about LGF before, most recently when Oscar buzz was growing for Crash, and it stands with three other companies in the industry that inhabit my portfolio -- Marvel (MVL), Imax (IMAX), and Dreamworks Animation (DWA) -- but I think Lionsgate is the one of those that's probably the safest bet, regardless of the fairly turbulent history of it's stock.

Unlike DWA and MVL, which depend on one or two blockbusters a year to drive their success, Lionsgate is going to throw tons of niche material at the marketplace at relatively low cost and see what sticks. With a much larger number of productions in both film and television every year, LGF doesn't live or die with the success of any one film (as we can see from their solid 2005 despite the failures of a few of their larger films like Lord of War and In The Mix).

And unlike IMAX, which depends on the continuing interest of moviegoers in the communal viewing experience of event films, LGF has a huge library of films on home video and television products that supply a very solid ongoing revenue stream regardless of the theatrical performance of any one film.

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Oscar Buzz (LGF)

I've noticed a lot of attention being drawn to Lionsgate Entertainment (LGF -- click to register for free RT streaming quote) lately. Not only do they have a hit movie on their hands, but Oscar buzz and upcoming plans for their films this year are garnering a lot of press.

There was a nice article on LGF at TheStreet.com today -- calling them the "little studio that could."

And Business Week article yesterday touting the potential for LGF should Crash perform well at the Academy Awards.

It makes sense that everyone wants to write about film studios when the Oscars roll around, and Lionsgate is a great story -- one that's very well illustrated by the Crash story. LGF bought Crash at the Toronto Film Festival when no one else was interested, paying a few million ... and it turned into a huge critical darling and a solid hit with over $60 million at the box office and in DVD even before Oscar night.

That's the Lionsgate template -- find films that don't fit neat Hollywood niches, that don't have stars, or that make big studios uncomfortable, make and/or market them on the cheap, and reap the rewards. When you don't spend hundreds of millions of dollars on marketing and star trailers, it's a lot easier to make a film break even ... and some of them, like Crash, will make huge profits. Others like Lord of War and In the Mix will flop, but even on those high profile disappointments Lionsgate doesn't lose nearly as much as the big studios do on their flops.

And while this year is starting off with a bang with Tyler Perry's Madea's Family Reunion bursting out of the box office gate to win last weekend, it looks like it will end with a bloodletting as Lionsgate has announced that their biggest horror franchise, Saw, will see its third installment on Halloween.

In between, LGF continues to innovate and churn out profitable films and tv series at minimal cost, even as their huge film library continues to pay the bills -- and that library may become even more valuable if the transition to Blu-Ray or to widespread video on demand spurs interest in their titles like Terminator 2 and Dirty Dancing.

I'm eager to see how their first-ever partnership with Starbucks will play out, Starbucks will be promoting Akeelah and the Bee in their stores this Spring, and that might be just what this kind of feel-good word-of-mouth movie might need to get some real attention.

Lionsgate has had a big run since they scared investors back in December, and they've now recovered to close to my purchase price. In my opinion it doesn't matter much whether or not they win any Oscars for Crash this weekend, I think they've got a great business model and should prosper, with hiccups, for years to come.

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Annual Checkup -- LGF

It wrote a bit about Lionsgate (LGF -- free portfolio tools and RT quote) a few weeks ago when the CEO said some things that weren't so entertaining. Not a lot has changed since then -- LGF still has a bright long term future, I believe, and they seem to be committed to refocusing on their strengths after making some mistakes with overspending on promotion for disappointing star vehicles this past year (thanks for nothing, Nicholas Cage and Usher). The big news since they downgraded their guidance is twofold: Hostel and Starbucks. Hostel took the concept of "American backpackers in European trouble" that so entertained back in the American Werewolf in London days and added about a thousand gallons of blood and gore, to great success. Hostel won the weekend box office for LGF last week, just as Saw II did a few months ago. And Starbucks and Lionsgate have agreed to comarket and codistribute Akeelah and the Bee, which could dramatically increase the audience for that film. While Akeelah is likely to get a lot of attention with this deal, its "inner city spelling bee" subject is a little cleaner than LGF's recent hits like Hostel -- these horror (analysts call them "genre") movies, cheap to make and popular as all get out, are clearly the way to go for almost-guaranteed profitability at the box office. Sprinkle in a few critical low budget darlings every year, and some cheap TV shows that get a lot of press, add a dash of children's programming that advertisers crave, and top it all off with a library of thousands of films and TV shows that are prime content for the VOD and next-generation DVD arena, and I think LGF looks great for the next few years (for dessert, you might look at the ongoing rumors about consolidation and see a nice buyout offer for this tantalizing studio and library). I bought my shares at an average price of about $10.50, so I'm still significantly under water, but I'm holding and I continue to think we'll see some great performance from Lionsgate over the long haul ... even if we have another tough few quarters.

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Not so Entertaining (LGF, IMAX)

Some of the entertainment stocks in my portfolio have been taking a real pounding lately.

Some of my old standbys are just standing around ... Marvel (MVL -- free real time quote from ADVFN) has been flying under the radar with no recent film news, and I think they'll be stable until news comes out about next year's films (though I also think this is a buying opportunity as we wait for Spiderman III and Xmen III). Dreamworks Animation (DWA -- free real time quote from ADVFN)has also been relatively free of news in recent weeks if you ignore what's been happening with their parent studio -- Wallace and Gromit didn't do as well as I would have liked, but Madagascar certainly evolved into a significant film and I'm looking forward to seeing how management handled the DVD market with this one in light of their Shrek 2 mistakes last winter.

But I've noticed some significant weakness in particular in IMAX (IMAX -- free real time quote from ADVFN) and Lionsgate (LGF), and my positions in both are down in the neighborhood of 25% today.

IMAX had a significant downgrade from an analyst who doesn't see mid-size theaters adding their MPX technology to multiplexes -- that may be true, and it sounds like the analyst did a solid channel check, but I don't see why it's a big concern. At this point in their growth cycle with significant overseas expansion and still very few theaters built in the US they don't have to win over the small operators yet. Small theaters follow the trends and have much less flexibility with capital spending than do their large competitors. If they need IMAX to compete in 10 years, perhaps they'll get it. I'm not worried that they don't yet have an interest.

More importantly, IMAX has had a great holiday season with Polar Express and Harry Potter -- more evidence that their strategy of remastering and releasing Hollywood hits and event movies is working great. As they continue to work out the installation backlog and gain new orders, we'll see these films all bringing in additional sales at very little additional cost. I see long term growth ahead (though it's still plenty risky -- the fancier and cheaper home theaters get and the shorter the time lag for DVD releases, the more the "event movie" and the IMAX experience will have to fight for attention). I filled out my IMAX position a number of weeks ago, and now I'm just sitting and watching.

Lionsgate (LGF-- free real time quote from ADVFN) is another matter -- but on the whole I'm optimistic moving forward. They changed their name (from Lion's Gate to Lionsgate -- WOW!), but more importantly the CEO recently spoke about guidance and about the need to refocus on their core competencies.

Their problems this year were the kind of standard Hollywood problems that this small company is not supposed to have -- they aim to buy and create niche film and other entertainment properties on the cheap, promote them effectively but inexpensively, and make money in the corners of the market where the big studios can't or won't succeed (horror, indie films, etc.). This year they had a few films with bigger budgets and significantly larger promotion budgets (Lord of War, Devil's Rejects, In the Mix), and all three of those films flopped at the box office and may or may not even break even on DVD and cable distribution. In light of this, I think management's assertion that they made a mistake in spending so heavily on these films is a good thing -- they recognize a mistake, they plan not to make it again. And even with those higher profile mistakes, the huge successes of Crash, Diary of a Mad Black Woman, and Saw II (a particularly big hit which I wrote about here) helped them have a decent year. We'll see how they do next year, but this is always going to be a volatile one.

I'm not making any decisions based on any of this stock price movement -- I fully expect both IMAX and LGF to continue to make dramatic moves on short term news, including both successful and unsuccessful film releases.

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Thought I Saw a Saw, too (LGF)

Well, Lion's Gate (LGF -- free real time quote from ADVFN) got a nice boost today -- I've been holding this one for quite a while but haven't written much about them, so I thought I should sit up and pay attention.

**UPDATE (11/1): Just saw a good article in Marketwatch that was published late yesterday after I posted this -- lots of good points there, including that one of LGF's real strengths is the fact that they run their own film distribution, as well as more on Lion's Gate as an acquisition target -- worth a read.**

I bought my shares of Lion's Gate Entertainment in a couple purchases over the last six months, with my average purchase price being $10.47. So as you can see, I am a bit under water with this one even after the Saw II-inspired jump. Long term, I'm still confident that the company will succeed and I'll be amply rewarded.

Lion's Gate occupies a very nice niche in film and tv production, and I think it's one that's destined to be a money maker for them. There are two things that make them stand out for me as a solid investment:

First, they develop and/or buy low budget but potentially profitable films that the huge studios wouldn't be interested in wasting their time on, and give them a chance to succeed -- either with critics for sleeper hits, or with niche audiences, especially horror, that have a chance to break through without star power or big budgets. In some cases, they're able to build these films into franchises that can develop a strong following and open, as has the gruesome looking Saw II, with great weekend box office numbers. LGF's boost today was due to the fact that Saw II broke the weekend opening record for the studio with about $30 Million in ticket sales ... not shocking for most movies, but pretty impressive for a film that had a budget of about four million dollars.

If you make enough movies with potential and don't spend that much on them, the successes can really flow -- but it's still the movie business, so for every Crash that's a critical hit and makes back it's nut many times over, you've got a Lord of War that disappoints. As long as you're not making $200 million special effects spectaculars, you don't need to have a blockbuster every time. The same goes for the TV business -- they're doing great with Weeds on Showtime right now, and they have that silly reality show with Tommy Hilfiger and lots of smaller profile projects including some ABC Family stuff ... the key is, they have a lot of irons in the fire that have the potential to be profitable.

And second, they own tons of content, which I continue to believe will be a great long-term driver for their earnings. In the days to come when movies are even more easily available either online or on demand on your TV, the owners of those movies have a chance to really capitalize on their libraries -- and Lion's Gate has one of the best libraries out there, with everything from the old episodes of Moonlighting to Dirty Dancing to the Halloween movies and, according to the company, more than 8,000 other titles, including lots of successful films, television shows, and kids' fare. There's an interesting Motley Fool article about their latest acquisition, and it is key to note that they do keep building this library both through purchases of other studios and libraries and through their own productions.

Now, the fact that LGF focuses on it's library and on releasing film and tv properties that are low cost generally means that their earnings shouldn't be as lumpy as the blockbuster-driven studios -- we shouldn't see feast or famine here. But that's not necessarily how it has worked in practice. Right now, with Yahoo Finance numbers, they're trading at a PE of 100+ and a forward PE of under 20 ... so you can see it's not all a steady climb up the earnings ladder. They carry a fairly large amount of debt -- more than $400 million, a lot for a $1 billion company, but their free cash flow could pay that off in a couple years if necessary.

The key for me is that this is a small company with some growing film and tv franchises and a very attractive library of entertainment properties. Management has proven that they're able to find low cost properties and libraries and leverage them into enough success to keep the company growing, and I fully expect that they will build on this as we move forward. Mark Cuban, among others, apparently agrees -- he's invested in Lion's Gate as part of his position in theater and entertainment properties, which include HDNet, Landmark Theatres, and others. Lion's Gate has been bandied about for a long time as a potential takeover candidate, too, thanks largely to the value of their library, but it looks to me as though they want to make a go of it on their own (depending, I'm sure, on the offer).

So this is a fun one for me to watch -- interesting films and tv products that really stand out and sometimes make a lot of money but rarely lose much, some real potential for leveraging the content of their library into new media, and always that little chance that the big boys might come along with a pile of money to buy you out.

So when might I sell? Hopefully never, but the things that would scare me would be any big changeovers in management or a change of focus. Finding artistic talent and producing films is a business that relies on judgement, especially when you're not dealing with star-driven effects films, and I like the judgement of the guys that run the show today ... If they started to get excited about their press releases and left their zone of competency to put together a mega-budget Saw III with Arnold Schwarzenegger and Renee Zellweger and groundbreaking special effects, I'd start looking for en exit.

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