On June 15, 2011, I wrote an article arguing that the movie exhibitors offered investors a compelling risk/reward opportunity.
The first quarter of 2011 was a difficult one for the movie exhibitor industry with the total domestic box office down almost 22%. Put bluntly, films like The Green Hornet, No Strings Attached and Just Go With It were not going to be competitive versus the Q1 2010 blockbusters Avatar and Alice in Wonderland.
With the second quarter ending this week, the box office has made a stellar comeback. As of the week ended June 23rd the 2011 box office was down approximately 9% versus 2010, making up over 50% of the underperformance from the first quarter. And with the weekend of June 24-25 showing a 9.7% increase over the same weekend in 2010, the numbers will improve further. Finally, to cap off the second quarter, the massive blockbuster Transformers 3 opens Wednesday, June 29, on 3,900 screens. Recall that the second Transformers film had the fourth largest single day opening of all time at $62mm (click here for box office data) and the movie will have two days of impact on the overall second quarter box office. And Transformers will be followed in Q3 by the final Harry Potter film which opens July 15. The third quarter should have a very strong start.
While much has been made of the lackluster 3D performance of certain films like Pirates of the Caribbean 4, Kung Fu Panda 2 and, most recently, Cars 2, the overall box office speaks for itself. If 3D attendance is down but box office receipts are up it means attendance is up. With increased attendance comes increased concession sales and for the movie exhibitors concession sales are higher margin than ticket sales. Therefore there is a natural hedge for the loss of the 3D premium for the exhibitors as long as attendance is strong.
With a strong second quarter almost complete and a great movie slate continuing to roll out, movie exhibitors should have strong earnings. With reasonable valuations and strong dividend yields, Regal (NYSE:RGC) and Cinemark (NYSE:CNK) offer good value. Carmike (NASDAQ:CKEC) is smaller and will use its cash flow to pay down debt, increasing the value of its equity.
Disclosure: I am long RGC, CNK, CKEC.