The movie theater industry is set for further growth, despite increasing competition with online, on-demand, and at-home media consumption.
The entertainment business has been undergoing massive upheaval recently, with streaming video services such as Netflix (NASDAQ:NFLX) and Amazon Prime (NASDAQ:AMZN) generally stealing younger generations away from the movie theater experience.
In its third-quarter of 2018 earnings, Netflix, for example, boasted a 31% year-on-year subscriber gain to nearly 7.0m - a new Q3 record. The company had also trounced market expectations, with earnings of US$0.89 per share compared to less than US$0.70 EPS anticipated, while revenues were as-expected at US$4bn.
However, while internet-based firms such as Netflix, Amazon Prime, and Hulu have infiltrated living rooms and mobile phones, they have not appeared to deter moviegoers from buying tickets at traditional box offices.
Recent blockbuster films, along with support from a firmer U.S. economy, have spurred an influx of crowds to the theater.
AMC Entertainment (NYSE:AMC), the largest movie exhibition company in the U.S., said it set a new all-time quarterly box office record in Q2'18, generating US$3.33bn, reflecting the growth of 22.7% compared to the same year-ago quarter.
The company noted that total U.S. attendance rose 20.6% year-on-year in Q2 to almost 70m, despite a rise of nearly 2% in the average ticket price. Furthermore, Q2'18 total U.S. revenues spiked 24.6% to about $1.13bn, comprised of about 23% in increased admissions revenue, 23% rise in food and beverage sales, and a 59.3% climb in other theatre intakes.
More recently, AMC said it had "massive consumer response" to its packaged/discount promotional programs AMC Stubs and AMC Stubs A-List. The firm noted that AMC Stubs A-List will cross more than 500,000 enrolled members in the very near term, eclipsing its membership expectations for the end of the first full year in 4 1/2 months.
AMC said the results were largely driven by its A-List program, and overall, AMC Stubs has surpassed 17 million-member households, up 580% after 2 1/2 years.
The company attributed much of its Q2 success to films such as Avengers: Infinity War, A Quiet Place, Deadpool 2, and Solo: A Star Wars Story. Also, the success of top-box office movies in Q3'18, including Mission: Impossible - Fallout and Crazy Rich Asians, coupled with an uptick in U.S. consumer spending, could bode well for AMC on Thursday when it announces its third quarter earnings.
Mission: Impossible - Fallout and Crazy Rich Asians each topped monthly box office charts, with year-on-year increases of 4.3% in July and 72.8% in August, respectively, according to Box Office Mojo.
Upbeat economic backdrop
AMC has also likely benefited from higher household incomes and discretionary spending.
The Bureau of Economic Analysis noted that personal income increased 0.2% in September to US$35.7bn, with disposable personal income (DPI) up 0.2% to US$29.1bn, and personal consumption expenditures (PCE) up 0.4% to US$53bn.
The BEA said the rise in personal income partly reflected increases in wages and salaries, amid an unemployment rate in September that fell to 3.7% - the lowest level since December 1969.
Against this backdrop, AMC's stock had mushroomed roughly 104.25% from its 52-week low of US$9.695 set in mid-November 2017 to its 52-week peak on September 21, according to IBKR's Trader Workstation (TWS). The firm's shares have also grown a little more than 56% since Moody's Investors Service downgraded its credit rating in early February 2018 further into junk status to 'B2' from 'B1'.
Meanwhile, certain of the company's bonds have not fared as well, amid the rating cut, as well as the lift in U.S. interest rates.
Yields on AMC's 6.125% notes due May 2027, for example, have risen around 134bps since mid-December 2017 - having peaked at 145.5bps higher at the end of October. The yield on the 10-year U.S. Treasury note was last up at around 3.21%.
Moody's had attributed its ratings action to AMC's worse-than-expected results during 2017, with consecutive and material downward revisions to guidance, including expected revenue and EBITDA. In 2017, the North American box office fell by around 2.7%, with a more than 6% decline in ticket sales - the worst turnout since 2005.
The international scene
Analysts generally point out there has been an upward trend of traditional large-screen films being produced - not strictly for domestic markets - but for global audiences to generate sufficient revenue to be profitable.
To help steer its global presence, AMC had embarked on a buying spree over the past two years, including its purchase of Nordic Cinema Group in early 2017.
The acquisitions have spurred a rise in the company's leverage to roughly 7.0x, and Fitch Ratings recently noted it expects AMC's free cash flow to remain negative in fiscal 2018 owing to its capex plans to upgrade theatres in the U.S. and internationally.
As of June 30, 2018, AMC said it held US$316.4m in cash and cash equivalents and a total debt balance of about US$4.8bn, including capital and financing lease obligations.
Moreover, global trade concerns, notably between the U.S. and China, have instilled some fears that further escalation may harm the Hollywood industry.
Uncertainties over whether China will decide to cease on-going negotiations to increase the number of revenue-sharing foreign film imports has generally made Hollywood executives somewhat nervous. The government could also decide to place a ban on the exhibition of U.S. films in China in retaliation against any further U.S.-imposed tariffs.
AMC said that overall Q2'18 international industry box office intake "did not fare as well as the domestic box office," with the countries served by Odeon's theatres seeing a 4.3% decline, while the countries served by Nordic witnessed a 9.4% decrease compared to the same period in 2017.
Overall, while the recent domestic environment has helped AMC's top line, the intensified competition with streaming media services continues to pose a hurdle to its growth prospects.
Moody's analyst Jason Cuomo recently said that AMC's "dependence on a concentrated, and smaller number of large movie studios that are captive to the theatre operators is also a concerning factor as these companies are under pressure and searching for ways to remain relevant and profitable in an evolving ecosystem."
The giant exhibitor is further challenged by a mature and unpredictable U.S. box office, contributing close to 70% of the company's pro forma revenues.
Shares of AMC were last down a little more than 2% intraday Tuesday at US$18.78 and off about 2.35% relative to the Consumer Discretionary SPDR ETF (NYSEARCA:XLY).
Note: This material was originally published on IBKR Traders' Insight on November 6, 2018.
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