Stock Watch
Metro-Goldwyn-Mayer: Film Flop
This moviemaker and distributor drags under the weight of rising costs and the unpredictable nature of its business.
April 15, 2004
Metro-Goldwyn-Mayer (MGM) is the studio behind such movie hits as James Bond, Rocky, Ben Hur and Legally Blonde. But its legendary roster may not be enough to compensate for rising filmmaking costs and the unpredictable nature of its business.
"A box office triumph or flop can make or break any given quarter for MGM," says Morningstar analyst T.K. MacKay. This makes the process of valuing the company's stock "mere guesswork," he says.
Rising costs add to the uncertainty. According to the Motion Picture Association, box office revenue has increased 5% annually over the past 20 years while the cost of making a movie has risen 9% annually. This has squeezed industry operating margins by almost one-third. MGM's own operating margins are quite volatile -- between 2000 and 2002 they swung from 8% to -6%. Last year they sat at zero. Earnings are also prone to swings. After reporting an earnings loss last year, MGM is expected to earn 3-cents per share in 2004 (giving the stock a P/E ratio of 587).
MGM's library of more than 4,000 movie titles, however, has been the company's bright spot. Sales of its DVDs increased 54% each of the past two years. But MGM's dependence on movies makes it much riskier than other diversified entertainment companies like Disney (DIS), Viacom (VIA) and Time Warner (TWX), says MacKay.
--Erin Burt