Over the past few months, I have written several bullish articles about the movie exhibitors, the most recent of which was on July 6.
The CEO of Carmike Cinemas (CKEC), in an article published on ledger-enquirer.com, discussed the 2011 movie slate versus 2010. He references the abundance of sequels in 2011 as outperforming risk taking films in 2010 that did not play well with audiences. Specifically, he cites Pirates of the Caribbean: On Stranger Tides, Cars 2, and Transformers: Dark of the Moon as helping 2011 performance to date. Further, he calls out Harry Potter and the Deathly Hallows: Part 2, and Twilight Saga: Breaking Dawn Part 1 as additional sequels opening in 2011 that should further drive box office revenue.
Tonight, the final Harry Potter movie opens with midnight screenings and, as Boxofficemojo points out, the film is already breaking records, with over $32mm in advance ticket sales. Regal has stated that they have already sold over $10mm tickets for the 535 locations they operate, while MovieTickets.com has already sold more Harry Potter tickets than for any other 2011 release, representing a 38% increase over the prior Harry Potter film. This is going to be a big movie. For its midnight launch, the movie will show at over 3,800 locations (note that the record box office for midnight screening is held by Twilight Eclipse at $30mm – and, the next Twilight film opens in November 2011).
There are additional sequels in 2011 that were not referenced in the article. A new Sherlock Holmes film once again starring Robert Downey, Jr. opens later this year. The trailer just became available. A new Mission Impossible movie also opens in December 2011. In 2012 we know that there is also a superlative move slate including the third Batman film from director Christopher Nolan named The Dark Knight Rises, a third Men in Black film, a third Madagascar film, a reboot of the Spiderman franchise, the second Star Trek film from J.J. Abrahms, the final Twilight film and the first Hobbit film (a prequel to the Lord of the Rings trilogy). Those are just the highlights to an incredible movie slate from now through the end of 2012. And in 2013, there will be a third Iron Man film, a sequel to the animated hit Despicable Me, the second Hobbit film, and more, but let’s not get ahead of ourselves. The point is that the weak movie slate in the second half of 2010 was an aberration. Some movies will underperform expectations and some will outperform, but looking forward, there are some highly anticipated movies coming from franchises with built-in fan bases. When you add in the potential for new franchises and other films like War Horse coming later this year from Steven Spielberg, David Fincher’s follow-up to The Social Network with The Girl with the Dragon Tattoo and many others, the movie slate is very healthy.
Harry Potter will be a box office boost, and no doubt, that makes the exhibitors very happy, but it is not a savior, because the industry does not need a savior. As evident by the content of this article, exhibitors know the movie slate well in advance and have been talking about its strength for some time. Investors taking a long term view who can understand the potential for outsized cash flow generation will be rewarded.
My favorite play in the exhibitor space is Carmike Cinemas. Trading under $7 per share with a market capitalization of $88mm, Carmike offers investors a tremendous risk/reward opportunity. Unlike Regal Entertainment (RGC) and Cinemark (CNK), Carmike does not pay a dividend, as the company has been focused on paying down debt over the last few years. As debt decreases, there is a natural benefit to earnings. Once Carmike gets to its debt target of $200mm, it can consider how best to utilize excess free cash flow to benefit shareholders. Further, Carmike’s footprint in small towns helps mitigate one of the bears' main complaints about the industry – namely that movie attendance will continue to trend down given the plethora of film delivery options in the home (Netflix, Hulu, Coinstar’s Redbox, video-on-demand, etc.). I would argue that people still enjoy going to the movies, especially in smaller towns and cities. Carmike currently trades at 7.5x trailing EBITDA, a discount to its peers. Regal trades at 10.0x, and Cinemark trades at 8.2x. There was a time when this discount made sense, given Carmike’s debt load, but given their debt pay down, the magnitude of this discount no longer makes sense. In addition, Carmike could be an acquisition target for one of their larger competitors.
Disclosure: I am long CKEC, CNK.