Movie Exhibitors: Don't Get Lost in the Data and Miss the Big Picture

Includes: CKEC, CNK, RGC
by: Adam Muller

The stocks of movie exhibitors fell yesterday as several Wall Street analysts came out with negative comments including a downgrade of both Regal Entertainment (NYSE:RGC) and Cinemark (NYSE:CNK) from Janney Montgomery Scott. The stock reactions were significant with Regal falling 5%, Cinemark falling 4.4%, and Carmike falling 0.4%.

Seemingly lost in the data and comparison of box office revenue to expectations is that these companies generate significant cash flow, in the case of Regal and Cinemark pay material dividends, and the movie slate for the balance of 2011 and into 2012 remains excellent. Is anyone not going to see Chris Nolan’s follow-up to the Dark Knight in summer 2012? Investors who can take a longer term view and not get lost in the daily or weekly comparisons should benefit.

This is not to say that the ongoing box office numbers are not important, but they needs to be put in proper context. For example, "Transformers: Dark of the Moon," the third film in the series, set a July 4th weekend gross box office record taking in an estimated $116.4mm over the four days. This sounds like great news, however the 4-day July 4th weekend as a whole was down versus 2010. Box office revenue for July 1-4, 2011, was $228.8mm versus $240.1mm for July 2-5, 2010, a decrease of 4.7% despite the impressive performance of "Transformers: Dark of the Moon." However, it is important to note that July 4, 2011, was a Monday. In 2010, July 4th was Sunday with Monday being the observed holiday to create the long weekend. Excluding the Monday box office and looking at Friday through Sunday reveals $191.8mm in box office revenue for July 1-3, 2011, versus only $180.5mm for July 2-4, 2010, a gain of 6.3%. This means that Monday July 4, 2011, had box office revenue of $35.9mm versus $61.4mm for Monday July 5, 2010. Why was the Monday box office this year so much lower than last year? Perhaps the weather was better across the country and more people were out in their backyards tending the barbeque and watching fireworks. The point is that one day does not a trend make. Having the 4th on the Monday could impact the box office.

Examining the data over a longer time period is important. The first quarter of 2011 was a difficult one as the industry ran up against difficult comparisons versus 2010. In fact, difficult does not even describe it given that both "Avatar" and "Alice in Wonderland" are in the top 6 films of all time as measured by worldwide gross ticket revenue, with "Avatar" having the honor of having both the top domestic and international gross of all time. As a result first quarter 2011 box office revenue of $1.9 billion was 22% lower than the $2.4 billion generated in Q1 2010. The second quarter has been a different story with Q2 2011 box office revenue of $2.63 billion versus $2.58 billion in 2010, an increase of 2.2%. Year-to-date through Q2 the box office is now down only 9.5% versus 2010. Further, the movie slate for the remainder of the year includes the final Harry Potter film, "Captain America," "Twilight Breaking Dawn Part I," "Mission Impossible 4," "The Girl with the Dragon Tattoo," and 2 offerings from Steven Spielberg, "War Horse" and "Tintin."

Whether the box office exceeds or misses Wall Street estimates does not speak to the fact that the movie slate is strong and the movie exhibitors will generate significant cash flow, and pay dividends (Regal has a dividend yield of 7.1% with Cinemark at 4.2%). Yes, the threat of video-on-demand remains on the periphery and 3-D may or may not be a fad, but people still enjoy leaving their homes to go to the movies and that is not going to change in the near or medium term.

The current pullback in the exhibitors is a great opportunity for investors who have a longer term view.

Disclosure: I am long RGC, CNK, CKEC.