The Hunger Games of Earnings Season

Due to the blockbuster success of The Hunger Games, it is heavily speculated that Wall Street traders are now uttering the phrase“may the earnings be ever in your favor” on the trading floor.  Yes, this line wasn’t exactly in the movie, but it rings true to the importance of earnings season.

While astute academics will insist that stock prices are the result of rational, calculated decisions made by investors, the volatility that surrounds earnings reports proves otherwise.  In some cases, the markets do trade off of emotion, which can be easily affected by news of any kind.  Better than expected earnings typically have a bullish effect on a company’s stock price, while lower than expected earnings do quite the opposite. 

Next Wednesday May 30^th, film distributor Lions Gate Entertainment Corp LGF releases its fourth quarter earnings report.  2012 has been a good year for LGF shareholders, as its stock has returned over 55 percent.  The company’s prize Hunger Games had the fourth best opening weekend in movie history, grossing over $150 million worldwide.  Since then, ticket sales have surpassed the $600 million mark, and with the film set to be released in China next month, more dollar signs – or Yuan – are on the horizon.  In next week’s release, analysts are expecting earnings per share of 34 cents, with a range between 11 cents and 87 cents.  Revenue forecasts are equally as uncertain, with the average being $628 million in a range between $453 million and $759 million.  In any case, this top end estimate would be a 64.0 percent boost from last year’s Q4 figure.  

Over the past week, shares of LGF have anticipatorily risen 5.7 percent, though valuation metrics are sending mixed signals.  Specifically, the stock is trading at a forward earnings multiple of 12.5X, higher than competitors like Time Warner Inc. TWX, CBS Corp CBS, and Viacom Inc. VIAB.  When growth is factored into the equation, however, a PEG ratio of 0.6 means that LGF may be undervalued at the moment. 

Either way, it is crucial that bulls and bears alike pay attention to the company’s earnings release on Wednesday.  Given the uncertainty in today’s markets, it is likely that investors will jump on LGF if earnings impress, and sell the farm if earnings disappoint.  Check out Benzinga Pro for up-to-the-minute news regarding this situation.

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