Movie Stocks: Is The Show About To End?

|
Includes: CKEC, LGF
by: Justin Kuepper

Movie stocks have been putting on a good show recently. According to Tickerspy's index, the sector has risen 13.3% on average over the past month, which is 11.3% better than the S&P 500 (NYSEARCA:SPY). In this article, we'll take a look at some of the catalysts behind the sector's rise, two stocks that have experienced some significant gains, and where they may be headed moving forward.

The gains in the industry have been largely attributed to several stronger than expected box office hits, including the Twilight series and now the movie "The Hunger Games." With these two solid performances, many analysts are increasingly bullish on the industry's upcoming pipeline that includes films like "Men in Black III," the "Skyfall" Bond movie, and "The Dark Knight Rises."

Carmike Cinemas Beats Expectations

Carmike Cinemas (CKEC) has been among the top performers in the industry, with one-month performance of 59% and a three-month performance of 105.7%. These gains were largely driven by the company's strong fourth-quarter earnings of 14 cents per share on revenue of $120.1 million, compared with estimates of 5 cents on $112.2 million in revenue.

After the strong results, Barrington analysts raised their price target to $17.00 per share, citing the higher-than-expected fourth-quarter results. The analysts also believe that the company is beginning to create positive screen count trends that should result in higher expansion potential, according to an analyst note from March 14.

With a current share price of $13.31, the analyst's price target represents a 28% premium to the current market price. The company recently acquired Davis Theatres for $2.6 million and MNM Theatres for $10.8 million, which helped increase its screen count significantly, while it also rolled out its "Big D®" format auditoriums that have proven quite successful.

Hunger Games Boosts Lions Gate Stock

Lions Gate Entertainment Corp (LGF) is one of the most successful stocks in the group, jumping some 60% over the past three months and doubling over the past year. Much of this increase has been due to the successful release of Twilight and now "The Hunger Games," which have both been far more successful than earlier predictions.

"The Hunger Games" generated more than $302.8 million at the box office since its release, which narrowly surpassed the highest domestic grossing Twilight film. According to management, the company has "banked" on "The Hunger Games" and plans to de-lever "dramatically" over the next 12-18 months and reduce its debt.

Lions Gate's price target was raised by a number of analysts, including Piper Jaffray, Stifel Nicolaus, and Caris, with price targets ranging from $15.00 to $20.00 per share. All three analysts cited "The Hunger Games" higher-than-expected box office results for the increases. This is good news as the firm has banked on the movie.

With shares trading at around $13.22, the analysts' price targets reflect significant premiums ranging from 13% to 51%. The shares have recently taken a break, as traders and investors locked in profits, but successful future releases could boost the stock further to these analyst estimates.

Playing the Trends with Stock Options

Investors looking to capitalize on the movie sector may want to be careful, especially with the U.S. recovery on a rocky road. The success of the Twilight films and "The Hunger Games" has led to high expectations for upcoming movies this season, which could spell trouble if any of them fail to materialize. As a result, investors may want to consider a prudent options strategy.

Covered calls can provide long investors with an income stream that can be used to lower the amount of invested capital over time. And since the calls are written at higher strike prices, the only downside is selling too early. Investors may therefore want to consider writing covered calls at around the analyst price targets for these two names.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.