How To Play The Success Of The Hunger Games: Regal Entertainment

Mar.21.12 | About: Regal Entertainment (RGC)

The Hunger Games, the movie adaption of the bestseller novel by Suzanne Collins, reaches theaters this Friday. The Hunger Games is the first novel of a trilogy that is widely expected to be adapted into four movies, with the final book, Mockingjay, to be split into two movies in similar fashion to what was done with the final installments of both Harry Potter and the Twilight series.

It is a rarity for a widely anticipated blockbuster movie to be released in March, but when Lions Gate Films bought the rights to the trilogy, the frenzy surrounding the books had not yet hit fever pitch. Don't be fooled by its March release. The Hunger Games is as big, if not bigger, than Twilight and possibly Harry Potter. Three of the Twilight movies are amongst the top 50 domestic grossing movies of all time, with all grossing in excess of $280 million domestically. The Hunger Games will be bigger because it has much broader appeal. Like Twilight, The Hunger Games has a strong-willed lead female character who becomes involved in a teenage love triangle that will pull at the heartstrings of the female audience. For teenage boys, The Hunger Games has high-tech action and violence unlike anything in Twilight. Further, like Harry Potter, The Hunger Games has transcended teen fiction, and has captivated adults, who will also flock to the theaters to see the movie.

By way of evidence of the incredible business The Hunger Games is going to generate, Regal Cinemas Union Square location in New York City has ten midnight showings of the Hunger Games this Thursday night. Of the 10, seven are already sold out. On Friday, the official opening day, the movie starts playing at 10am, with a new show starting every half hour throughout the day.

How do you invest in The Hunger Games?

The movie studio Lions Gate Films (NYSE:LGF) owns the cinematic rights to The Hunger Games, but the stock has already had a stellar run and may be largely played out. A Bloomberg article published on March 20 articulates the recent success of Lions Gate's stock:

Lions Gate gained 7.9 percent to $14.25 yesterday in New York trading. The shares have risen 71 percent this year as investors weighed prospects for "The Hunger Games" and the $412.5 million January acquisition of Summit Entertainment, owner of the "Twilight" vampire films and rights to a series of science-fiction novels dubbed "Ender's Game".

Lions Gate not only has The Hunger Games franchise, but now owns Twilight, which has its final film release later in 2012. But, just because you may have missed out on the run in Lions Gate does not mean you cannot profit from the blockbuster that The Hunger Games and its sequels will become.

The Movie Exhibitors

The movie exhibitors, namely Regal Entertainment (NYSE:RGC), Cinemark Holdings (NYSE:CNK), and Carmike Cinemas (NASDAQ:CKEC), all will benefit greatly from the box office business that The Hunger Games will generate beginning at midnight Thursday. Further, with February having set a record at the best box office and with first quarter revenue up 16% and attendance up 19% versus last year, the movie exhibitors stand to have stellar first quarter results. And this data does not include The Hunger Games, which could put the quarter into record box office territory.

From a valuation perspective the movie exhibition companies remain very reasonable values given the free cash flow they generate:

Company

EV / 2012E EBITDA

FCF Yield (%)

Carmike Cinemas

5.8x

31.5%

Cinemark

6.7x

9.8%

Regal Entertainment

7.8x

14.2%

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Why Regal is the right play

All of the exhibition companies will benefit from both The Hunger Games and the remaining 2012 movie slate that is incredibly strong with movies like the Avengers, The Amazing Spider-Man, The Dark Knight Rises, Skyfall (new James Bond), Twilight Breaking Dawn Part II, and The Hobbit. Moviegoers have shown thus far in 2012 that if the product is strong, they will go to theaters.

I think all of the stocks will benefit from the movie slate in 2012. However, there are several unique characteristics of Regal that make it especially appealing given the catalyst that The Hunger Games will provide to the industry:

  • Regal has yet to participate in the current rally despite record setting first quarter box office receipts. Year-to-date Cinemark is up almost 20%; Carmike Cinemas has returned a solid 82%, while Regal is up just 19%.

  • Regal has significant short interest that should get squeezed as the box office continues its incredible 2012 performance with The Hunger Games as the near-term catalyst. The potential for Regal to blow away current first quarter estimates far outweighs the potential for a miss, which should make shorts cover and drive up the stock in the near-term.

  • Regal generates lots of cash and returns the capital to shareholders through its dividend, which currently yields 6%. Further, Regal has shown a willingness in the past to supplement the dividend with a special dividend when cash balances build.

For these reasons I suggest Regal as a way to play The Hunger Games onslaught that is scheduled to begin at 12:01am Thursday night/Friday morning. Longer-term, I like all three of the exhibitors. With Carmike trading at a discount to its larger peers, it may have more upside potential now that it has paid down its term debt to its $200M target and is starting to grow screen count.

Disclosure: I am long RGC, CKEC.