Joe Kunkle's  Instablog

 There is no secret that the recent economic downturn as led to cost-conscious consumers looking to spend less, and save more with uncertainty over employment security and dwindling savings and investment funds.  History also confirms this; after 1974 when economic growth was a mere 0.5%, movie growth was 25% and in 1982 the economy grew less than 2% while box-office income rose 16.4%.

This has led to the return to the classic date night, dinner and a move, where the dinner plans have changed as consumers trade down to the less fancy restaurants, but there Is still a growing demand to attend movies at the theater for the experience, while providers of movie rentals such as Netflix (NFLX) has seen its stock hit record highs.  Watching a movie at home is not really an option for most “casual-daters”, but has become more of an alternative for married couples.  Add in people foregoing vacations and instead going out to the movies as a “trip” and a new revenue stream has been created.  The box-office revenues are up nearly 10% year over year, despite the economic collapse, and Q1 ticket sales grew 14% year over year.

Recent box office numbers has shown that despite the amount of movies being pirated off the internet, movie theaters are seeing strong growth in attendance, and movies are setting box-office records.  There is no reason to see this slowing, especially as the Summer approaches and blockbusters such as “X-Men Origins”, “Transformers 2”, “Star Trek”, “Harry Potter and the Half Blood Prince”, “Bruno” and the new “Terminator-Salvation” expected to be released.

Stocks such as Cinemark (CNK), Marvel (MVL), DreamWorks (DWA), Rentrak (RENT), Marcus (MCS) and Regal Entertainment (RGC) can all be seen as beneficiaries and recent price action and volume has provided clues that investors are taking notice.  National Cinemedia (NCMI) is also an interesting company providing live digital programming, a recent IPO, and is 59.5% owned by the larger theater firms.  However, another beneficiary will be the REIT’s that provide theater leasing and other entertainment related properties.  REITs were beaten up as a group with financial concerns and liquidity issues, although some were unfairly sold off as the underlying businesses have ample cash flows to continue to not only provide lease payments, but also undertake expansion projects.

Entertainment Properties Trust (EPR) is one stock that I would keep a keen eye on, as it has theater properties in 26 states and is growing.  EPR also has investments in a NY Casino, a Kansas Water Park, and some Ski Resorts, but the majority (around 55%) of its revenues is from movie theaters.  Shares are down from $60 in October to $21 after hitting lows of $11.45 in early March, while the fundamentals remain solid trading at a PEG of 0.7, a 46% discount to book value, and positive profitability ratios.  There is also 14.38% of the float short, or 4.4 days to cover, so there could be considerable upside as shorts cover as they realize the company is a bargain at this value.  Also, dividend lovers will be happy to see the 12.4% yield.

The average remaining lease term is 13 years on EPR’s properties, and has 1.6x rent coverage for theaters opened in the last two years, and a 3.3x interest coverage ratio.  Also, the growing theater segment has multiple growth opportunities with the new launch of opera, sports, and 3-D showings at major theaters. 

EPR is a stable, high dividend yielding, investment that has a ton of upside with growth and expansion coming to the industry.  Shares recently broke out on a big volume day, but I am looking to buy on any small dip.

 Disclosure: No positions