The Risky Business of Betting on the Box Office

by Lawrence Meyers | January 11, 2013 11:25 am

The Risky Business of Betting on the Box Office

With this year’s Oscar nominations now released[1], you might look at all the big Hollywood movies coming out and think, “It’s going to be a great year! People will go to the movies in record numbers, and the studios will make lots of money.” That, however, would be a dream — much like the dreams on the silver screen.

The truth is there’s no way to accurately predict how many people will go to the movies and how much revenue the exhibitors and studios will generate. Analysts and studios can gin up a rough forecast, but the fact is nobody knows until a film is released. Even winning a coveted Oscar is no guarantee of financial success[2].

Consequently, trying to peg the annual earnings of companies like Pixar in the days before Walt Disney (NYSE:DIS[3]) bought it out was difficult, and even more difficult to place a valuation on the company.

That’s why I suggest not buying the movie exhibitors willy-nilly. You have to approach each stock with a specific reason for holding it. Here are some popular names and why you should consider them (or not):

Cinemark Holdings (NYSE:CNK[4]) has a couple of strong things going for it. For starters, it’s part of the joint venture of National Cinemedia (NASDAQ:NCMI[5]), which owns the time before your movie screens, which it sells for advertising. Cinemark is also experiencing international growth that makes it somewhat attractive. It pays a 3.1% yield, and that’s worth considering for income investors. For those looking to cash in on dividends, however, going with National Cinemedia itself as a pure advertising play offers a 5.8% yield. Be wary, though. It has paid more in dividends than it earned in free cash flow over the trailing 12 months.

Regal Entertainment Group (NYSE:RGC[6]) is a cash flow-rich business. It’s not because of the movies. It’s because, like other exhibitors, it buys popcorn for pennies and sell it for dollars. That’s where the real margin is, and maybe that’s why the stock trades in a range. Everyone knows the box office is a fickle master. But all that cash flow has a big benefit — a fat yield of 5.9%. The dividend is covered six-fold by free cash flow, so it makes for a good fixed-income play and trading vehicle.

Carmike Cinemas (NASDAQ:CKEC[7]) doesn’t produce as much cash flow as Regal — only about $20 million compared to Regal’s $160 million. It pays no dividend, so there’s no reason to own it.

IMAX (NASDAQ:IMAX[8]) seems to be all the rage, with its massive international expansion and joint-venture box-office revenue share. Will people continue to pay big bucks to see a limited number of movies appropriate for the format, with IMAX continuing to earn money by constantly upgrading its systems? Or do you think the whole thing is a fad that will eventually die out? I think the latter. So, I say stay away. Reasonable minds will differ.

The truth is that if you want to be in the movie business, then short of coming out to Hollywood and crashing on my couch, you’ve got to buy Disney. You get massive diversification across all kinds of entertainment assets, and you get LucasFilm, Pixar and Marvel along with it. That’s the game to play.

As of this writing, Lawrence Meyers didn’t own any securities mentioned here.

Endnotes:
  1. Oscar nominations now released: http://investorplace.com/2013/01/oscar-nominations-which-films-got-the-most-bang-for-their-buck/
  2. Oscar is no guarantee of financial success: http://investorplace.com/2012/02/oscar-nods-mean-little-for-investors/
  3. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  4. CNK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CNK
  5. NCMI: http://studio-5.financialcontent.com/investplace/quote?Symbol=NCMI
  6. RGC: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGC
  7. CKEC: http://studio-5.financialcontent.com/investplace/quote?Symbol=CKEC
  8. IMAX: http://studio-5.financialcontent.com/investplace/quote?Symbol=IMAX

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