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How to play it: Feasting on "The Hunger Games"

By David K. Randall

NEW YORK (Reuters) - On Monday night in Manhattan, a line of 50 teenagers camped outside of a Barnes & Noble in Union Square - preparing to spend 24 hours on the street just for a chance to see the stars of Lions Gate Entertainment's "The Hunger Games," which opens in movie theaters on Friday.

The film is based on a popular series of teen books, and eager teen devotion to the series has investors drooling.

Lions Gate Entertainment Corp stock is up more than 86 percent in 2012 and some 160 percent over the last 52 weeks, to $14.55, as investors see the expectations for the movie balloon.

Most analysts have positive outlooks for the stock and have an average rating between "buy" and "overweight," according to Thomson Reuters data.

But judging by valuations alone, investors just coming around to Lions Gate may be too late to the party.

The stock trades at 840 times its last 12-month earnings, compared with a 14 times earnings ratio for the broad Standard and Poor's 500 index.

Still, bulls say it is the next 12 months that really matter, saying "The Hunger Games" has the potential to be the next "Harry Potter" or "Twilight" - major franchises that threw off profits for studios for years.

No one expects another 165 percent gain over that time. But here are suggestions on how to play "The Hunger Games" before its opening weekend that may still give investors some profit:

PLAY THE STOCK ITSELF

Even with the big gains so far this year, some analysts say that the odds on the stock may still be in one's favor.

"It is more than clear that this film now has broad-based male interest," said Benjamin Mogil, an analyst at Stifel Nicolaus.

Mogil raised his estimates for the film's domestic box office to $300 million from $250 million and his target price for the stock to $17.50 (it closed at $14.55 on Thursday). The "Twilight" films, by comparison, have averaged $270 million at the domestic box office.

Lions Gate Entertainment will not take home all of its box office revenue as profit, of course. In his model, Mogil estimates that the company will take in a profit of $222.5 million from the first installment of the franchise, a figure that includes DVD sales and television residuals and accounts for costs like marketing and prints of the film.

The bulk of the money - some $130 million after tax - would come in the first year after the film's release and add about $1 in earnings per share, Mogil said. The company missed estimates in its last quarter and lost 1 cent per share, according to Thomson Reuters data.

If that scenario plays out, then Lions Gate Entertainment will see its balance sheet - and ability to bid for the next hot intellectual property - strengthen next year.

"(The company) is more of a free cash flow 2013 story," noted David Joyce, an analyst at Miller Tabak & Co.

Analysts say there is little chance that "The Hunger Games" becomes an epic flop along the lines of Walt Disney Co's recent "John Carter," a high-budget film whose poor box office performance led the company to say it expects to lose $200 million because of it. Disney's movie studio line is expected to post an operating loss of $80 million to $120 million in its current fiscal quarter because of the movie's lousy performance, the company said.

While "The Hunger Games" is clearly Lions Gate's biggest draw now, analysts think there is more to like than a single franchise.

"Beyond 'Hunger Games' we believe Lions Gate has developed a strong record in identifying and launching hit franchises, from films such as "Saw" and "Expendables" to TV shows such as 'Weeds' and 'Mad Men.' We expect that record to continue," said Marla Backer, an analyst at Hudson Square Research.

Prepare for volatility, however, before moving into the stock. Shares of Lions Gate fell 7.2 percent to close at $14.55 on Thursday, and analysts say that its strong run-up so far this year also makes it vulnerable to sharp downturns on some days.

Another sign of volatility ahead: according to Data Explorers, a firm that tracks short interest, about 55 percent of the shares available to short in Lions Gate Entertainment are currently being borrowed to sell short, a relatively high figure. That amounts to nearly 8 percent of shares outstanding, meaning a good number of investors expect the stock to fall.

GO BROADER

Investors who are willing to be one step removed from Lions Gate Entertainment may find cheaper ways to play "The Hunger Games."

Movie theaters may be the most direct play. As the hype over the film builds, movie theaters such as Regal Entertainment and Cinemark Holdings have increased their midnight screenings on opening night.

Theaters in the nation's 24 largest markets have increased midnight showings by 40 percent over the prior week, and nearly a quarter of these showings are already sold out, according to Backer. That could more than make up for the disappointing box office of "John Carter."

With some 150 new screens added overseas in the last year, Cinemark Holdings, in particular, may benefit from the expected worldwide appeal of "The Hunger Games," noted James Goss, an analyst at Barrington Research Associates.

The company looks to be improving domestically, too. Thanks in part to a small increase in margins, the company saw its concession revenue beat analyst estimates and increase 7.8 percent in its last quarter despite a drop of nearly 4 percent in attendance per screen, he noted.

The stock is up 19.5 percent so far in 2012 and trades a price-to-earnings ratio of 19.4. Its dividend yield is above-average at 3.8 percent.

Toy companies are another income-production option. Hasbro Inc and Mattel Inc, for instance, have licenses to market toys based on "Hunger Games." Both companies offer large dividend yields, stable balance sheets and trade like value companies.

Hasbro, for instance, trades at a price-to-earnings ratio of 12.4, inline with the broad S&P 500 index, and offers a dividend yield of 4 percent. The company is up 12 percent since the start of the year.

(Reporting By David Randall; Editing by David Gaffen and Matthew Lewis)

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