Lionsgate on Path to Riches

“You’re golden, sweetheart. You’re going to have sponsors lined up around the block,” Hunger Games veteran Haymitch tells Katniss after the heroine’s first media close-up in the initial installment of the dystopian trilogy.

And that’s precisely the review echoing around Wall Street today after the latest financial coup for “Hunger Games” distributor Lionsgate Entertainment (NYSE: LGF).

Lionsgate rang up a 71 percent revenue increase in the recently concluded fiscal 2013, handily beating analysts’ quarterly profit estimates in the process. The company delivered $280 million in cash flow as teens flocked to “The Twilight Saga: Breaking Dawn Part 2,” while cult favorites like Tyler Perry and the surprise comedy hit “Warm Bodies” also performed strongly.

And while the box office from theatrical releases, and in particular international distribution rights sales, paced the growth, the DVD business notched a 41 percent sales gain thanks to Twilight and Katniss’s exertions.

Coming up in November is the second installment of the “Hunger Games” saga as well as “Ender’s Game,” based on Orson Scott Card’s beloved sci-fi coming-of-age novel by. Scheduled for March release is “Divergent,” another dystopian tale about a young person revolting against the immoral rules of screwed up adults.

“One of our areas of differentiation is the focus on young adult properties,” said CEO John Feltheimer on this morning’s conference call. “…Owning the top young adult franchises, the Hunger Games and Twilight, gives us enormous catalysts.”

Indeed, teenage rebellion is already proving hugely lucrative for the adults in charge of the upstart studio, which was founded in Vancouver, Canada in 1997 and bought Twilight distributor Summit Entertainment in early 2012 for what now looks like a bargain price of $700 million in cash, stock and assumed debt.

In addition to Twilight, Summit brought to the table considerable overseas distribution expertise, and valuable experience with subscription video on demand, seen as the model of the future for content producers.

Lionsgate’s year-ago forecast of $900 million in adjusted EBITDA over the next three years now looks conservative, with the past year’s results raising the bar to more than $1 billion, according to the CEO. This year is expected to prove more profitable than the last and fiscal 2015 much more profitable still.

By then, more of Lionsgate’s TV shows will be earning it money in syndication. The company produces the “Mad Men” as well as “Anger Management” for Netflix (Nasdaq: NFLX) and FX and “Nashville” for ABC. Most of its 28 series run on cable and are sold under Lionsgate’s innovative 10/90 model. This commits a cable channel to buy 10 episodes of a new show and commits it to purchase 90 more if the first 10 achieve pre-agreed ratings. The arrangement limits Lionsgate’s up front risk and compresses to two years the waiting period before syndication, which is where successful TV properties make most of their money.

Internet content purveyors like Netflix and (Nasdaq: AMZN) are increasingly bankrolling original content to maximize their audience, and Lionsgate’s accelerated production schedules make it a cost-effective partner.

In July, Netflix will debut its “Orange Is the New Black,” a women’s prison comedy from the creator of “Weeds.” Lionsgate is also producing a new animated series for Amazon from the creator of “Everybody Loves Raymond” and the executive producer of “The Simpsons.” The beauty of these straight-to-Internet subscription shows is that they can still be marketed to cable and eventually enter syndication.

Lionsgate prides itself on its promotional and social media savvy, so that for example it knows that the Divergent book series is ahead of where Hunger Games books were at a similar point and that the second Nashville soundtrack is the third-ranked country album on iTunes. It’s mining young adult fiction for valuable movie franchises exactly as Marvel did with its comics inventory.

Which brings up the question of exactly how long Lionsgate will avoid Marvel’s fate of getting gobbled up by a media giant. Just as comics have proven to be a treasure trove for Walt Disney (NYSE: DIS) so too one day Katniss and the other tormented teens toiling for Lionsgate could enrich, say, Comcast (Nasdaq: CMCSK).

For the moment, the studio is thriving on its own. It sold $250 million of foreign distribution rights at the recent film festival in Cannes, adding to the prior $1.1 billion revenue backlog. Presales of foreign rights to expensive productions like “The Hunger Games” films mean that they only need to gross $15 million or so domestically before Lionsgate breaks even.

The stock has just hit a new record high at more than four times the price Carl Icahn got for his stake after a failed raid less than two years ago.

But scale is a must-have in the entertainment business, where it is key to controlling costs and gaining leverage in negotiations. “Critical mass” was a term used a couple of times on the conference call by the CEO as an attribute Lionsgate has either already achieved or will soon claim.

Eventually, all that critical mass could fetch a pretty penny and leave teen rebel Katniss greeting visitors to Universal’s theme parks. For shareholders, that would be a happy ending.