Like Movies? Favor Studios Over Theaters

Includes: DIS, DWA, IMAX, RGC, TWX
by: Stocks & Shares

Companies that participate in the motion picture industry are priced at widely different price multiples. Many of these firms require different levels of capital expenditure, too. Which, if any are compelling investments given recent developments and today's prices?

Disney Takes on U.S. Box Office, Rakes in Millions

Children's films have been great moneymakers. They drive entire families to purchase tickets and concessions at movie theaters. One of the more interesting plays in this space is Pixar, which was acquired by Walt Disney (NYSE:DIS).

Most recently, the Disney film "Wreck-it Ralph", another foray into 3-D animation that incorporates characters from a video game, topped the U.S. box office, as well as Canadian movie theaters. The film brought in $49 million in sales. "Flight" with Denzel Washington came in second, bringing in $24.9 million; while "The Man with the Iron Fists" starring Russell Crowe came in fourth. The other top five films included "Argo," which fell to third place; and "Taken 2," which took fifth.

"Brave", which opened in June, also finished at the No. 1 spot, a feat that was followed by "Wreck-It Ralph." At the start of November, Disney took the fourth spot amongst rival studios, tallying $1.22 billion in box-office receipts domestically. Sony has stayed on top of its rivals with $1.52 billion.
The movie is voiced by John C. Reilly, who plays Ralph, a video game villain. Ralph goes through other video games after getting tired of his stint as a villain. Other characters are voiced by Jane Lynch and Sarah Silverman. The movie took $165 million to make.

Box-office revenues for the top 12 movies went up 20 percent, to a total of $124.6 million. Domestic sales are also up to $8.89 billion, marking a rise of 4 percent.

Dreamworks Results

The DreamWorks Animation (NASDAQ:DWA) studio also saw sales rise in the third quarter of this year after, beating last year's sales. According to the Box Office film researcher Mojo, DreamWorks studio had receipts for $717 million worldwide by releasing "Madagascar 3: Europe's Most Wanted" in June of this year.

Bloomberg Industries' North American research director Paul Sweeney said:

The Company posted a solid quarter after several disappointments. At the end of the day for this company, it is about generating a steady stream of hits.

Third quarter net income increased 24 percent to $24.4 million, and sales rose 16 percent, beating analyst targets.

DreamWorks's Chief Executive Officer, Jeffrey Katzenberg, stated that company is looking to release more than three movies per year to generate more profit in the future. It is also planning to open theme park in New Jersey and an animation studio in China to hit more markets. The company is also investing in sound technology to improve the sound system in theaters. A spokesperson from the company has signed an agreement with Barco NV to incorporate 3D sound effects in its next 15 animated movies.

Choose Information Goods over Theaters

Investing is about minimizing cash outflows for the maximum and fastest cash inflows. Movie theater firms are a terrible proposition, because they require lots of capital expenditures to modernize facilities. These upgrades are not optional: they are needed to keep up with home theater and competing big theater technologies.

Content providers, on the other hand, can largely avoid these issues as they leverage their brands. They are scalable, with the costs of one thousand theaters running a movie almost the same as the cost of two thousand theaters running a movie.

The best investment in the movie industry is Walt Disney, which recently traded at $47 per share. The firm's 2.01 price-to-sales ratio, 15.58 price-to-earnings ratio, and 2.13 price-to-book ratio are close to the averages of these metrics for the S&P 500 index.

Not all studio stocks are attractively priced. Unfortunately, the DreamWorks Animation stock is too expensive, at a price of roughly $20, a price level which seems impossible to justify. Investors can buy more revenues per dollar from the S&P 500, since this index has a price-to-sales ratio of 1.32, while this stock has a much higher 2.36 ratio. DreamWorks Animation shares are trading at a pricey 23.73 price-to-earnings ratio, almost twice that of the 14.23 average of the S&P 500. The price-to-book multiple of this stock is 1.21, cheaper than the 2.07 S&P 500 average. This is low ratio for a company whose brands and copyrighted properties have considerable economic value. Unfortunately, the price-to-sales and price-to-earnings ratios are just too high, so investors who elect to play this stock would be betting on the firm's ability to convert its assets into more earnings in the future.

Similarly, Time Warner's (NYSE:TWX) stock is too expensive, at a price of roughly $45. The 2.33% dividend yield of the stock is comparable to the 1.82% 10-year treasury yield. Future dividend payments are likely, because the company pays out 0.38 of earnings as dividends, so earnings could drop considerably before dividends must be cut. The firm's 1.46 price-to-sales ratio is in line with today's prevailing market multiples. Time Warner shares currently trade at a high 17.45 price-to-earnings ratio, a higher value than the 14.23 average of the S&P 500 index. The price-to-book multiple of this stock is 1.44, cheaper than the 2.07 S&P 500 average. As with DreamWorks, the price-to-book multiple without much of the firm's intellectual property is what investors would find compelling. Investors would be speculating on converting these assets to earnings.

What is amazing is how many movie theater companies, which bear the risk of cash investments to improve the facilities, are not notably cheaper than these above studio companies.

Cinemark Holdings' (NYSE:CNK) stock is too expensive, at a price of roughly $26, a price level which seems impossible to justify. The firm's 1.23 price-to-sales ratio is in line with today's prevailing market multiples. Cinemark shares currently trade at a high 18.71 price-to-earnings ratio and a high 2.83 price-to-book.

Not only are these valuations uninspiring, the dividend yield of this theater stock is shaky. Shares offer a dividend yield of 3.25%, which is much higher than the 1.82% yield of the 10-year treasury bond. The sustainability of the firm's dividend payouts are in question, because the 0.61 payout ratio is about the 0.6 cutoff rule of thumb for maximum sustainable dividend payouts.

Unfathomable valuations are implied by IMAX (NYSE:IMAX) market prices of $23 a share. Investors can buy more revenues per dollar from the S&P 500, since this index has a price-to-sales ratio of 1.32, while this stock has a much higher 5.48 ratio. IMAX Corporation shares are trading at a lofty 44.51 price-to-earnings ratio, a price multiple more than four times the 14.23 PE ratio of the S&P 500. The 6.29 price-to-book multiple of this stock is higher than the 2.07 S&P 500 price-to-book ratio. These multiples provide no discount for the threat of required capital expenditures to keep theater locations modern.

At a price of roughly $16, Regal Entertainment (NYSE:RGC) stock also implies rich valuations. Regal Entertainment shares currently trade at a high 21.49 price-to-earnings ratio. This expensive multiple is not overruled by the 0.89 price-to-sales multiple of the stock. Ultimately, this theater stock should have consistently lower multiples than its studio counterparts.


At current prices, you should favor studio stocks over brick-and-mortar theater stocks. At current price multiples, Disney is reasonably priced. DreamWorks and Time Warner are more speculative.

Please read the article disclaimer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.