Can Movie Theater Stocks Keep Climbing?

http://www.businessweek.com/investor/content/apr2009/pi20090415_651155.htm

 

April 16, 2009, 12:01AM EST

Analysts believe rising cinema attendance and promising movie lineups should boost Regal, Carmike, and Cinemark. More 3D screens would help

By Aaron Pressman

Who goes to the movies in April? A lot of people. And that has analysts and investors excited about the prospects for such movie theater owners as Regal Entertainment (RGC), Carmike Cinemas (CKEC), and Cinemark Holdings (CNK).

Led by a pack of modest hits like Hannah Montana: The Movie, starring teen sensation Miley Cyrus, and Fast and Furious, starring Vin Diesel, the past two weekends have shattered box office records for April. So far, total 2009 receipts are way up from last year as credit-crunched consumers have looked to leave their troubles behind and escape at the movies.

"People have assumed for years that home theater and DVDs were killing off the business," says money manager Steve Birenberg, president of Northlake Capital Management and the media sector blogger for market research firm SNL Kagan. "Now we're seeing that's not true and it's much more stable and sustainable than investors thought."

Over the recent Easter weekend, the top 12 films brought in $130 million, up 61% from the same weekend last year. The previous weekend, which took in $148 million, was the biggest draw ever in April. And that comes after first-quarter receipts rose by 10% to 15% from the same period a year ago.

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Almost half of that box office revenue goes right into the coffers of theater operators—not to mention the benefits of increased sales of popcorn, soda, and other ultra-high-margin items at concession stands. "These are really strong numbers, especially when you don't see a real blockbuster in there," says James Marsh, a Piper Jaffray analyst who follows the companies.

Regal's stock price has already gained 42% in the past three months over growing excitement about the first quarter's box office boom. But at about 14 a share, Regal has only retraced the stock's prior three-month drop. Money manager Birenberg sees further upside because the revenue increase will fuel an even larger jump in earnings per share. Much of the company's expenses are fixed costs—owning and operating thousands of cineplexes around the country. When more people buy movie tickets, revenue growth far exceeds growth in expenses. And the same is true for shares of Carmike, up 30% over the past three months, and Cinemark, up 25%, Birenberg says.

The summer months, typically the biggest box office season of the year, also look promising. That's despite a tough comparison because of last summer's Batman blockbuster, The Dark Knight, which grossed over $500 million in the U.S., including a $155 million opening weekend. The summer of 2009 may not have as big a megahit, but upcoming releases in such popular franchises as Harry Potter, Transformers, Star Trek, and X-men should do the trick for theater operators, Marsh says.

Investors looking for additional beneficiaries of the attendance boom may consider buying shares of such big Hollywood studios as Time Warner (TWX) or Disney (DIS). But while domestic U.S. receipts are up, some overseas markets are down—and DVD sales are plummeting worldwide. Factor in that most of the movie studios are owned by media conglomerates with many other businesses and the stock play doesn't look so appealing.

Monsters vs. Aliens' 3D boost

UBS analyst Michael Morris reexamined his sell opinion on Dreamworks Animation SKG (DWA), one of the only "pure play" studio stocks. After three seemingly bonanza weekends of grosses for the studio's Monsters vs. Aliens release, the stock, at about 19, remains overvalued, he concluded. "Current profit expectations exceed the company's true potential given its very high per-film cost structure," Morris wrote in an Apr. 14 report.

In part, that's because the movie's $141 million of box office receipts were inflated by 3D showings. Theater owners charge a $3 premium for 3D tickets. This complicates the task of projecting final foreign box office receipts and DVD sales. Far fewer 3D venues exist outside of the United States and TV won't offer a 3D experience, warns Morris. "Enthusiasm for 3D is unlikely to translate into higher sales of these other products," he wrote.

Theater owners could get an even bigger boost if they increase the number of 3D showings. But the ongoing credit crunch has delayed funding for a planned nationwide upgrade. Regal, privately-owned AMC, and Cinemark banded together in 2007 to raise funds to install 3D-capable digital projection systems. The group, known as Digital Cinema Implementation Partners, planned to issue $1 billion of bonds backed by upgrade subsidy payments from the major movie studios. So far, the credit markets have demurred.

In March, Regency Chief Financial Officer Amy Miles said that she was "cautiously optimistic" that the three-company group would soon be able to raise about $700 million. Speaking at an investor conference in New York sponsored by Mario Gabelli's firm, Miles and Regency Chairman and CEO Michael Campbell said 3D movie showings were grossing about three times as much revenue as 2D showings in the same complexes.

The industry could reap a windfall if it can dramatically increase the 2,300 or so 3D-capable screens currently in the U.S. before director James Cameron's Avatar hits theaters in December. "The rush is on to get ready for Avatar," says Piper Jaffray analyst Marsh. "The financing needs to happen and we think it can before midyear."

Pressman is a correspondent in BusinessWeek's Boston bureau.