On Sunday, Hollywood’s biggest stars were dolled up and heading down the red carpet to celebrate the year’s top movies … and, of course, to see who the lucky winners would be at the 85th annual Academy Awards.
For most of us, though, the glitz, glamor and Oscar statues are far from what we think of when it comes to movies. Instead, we associate feature films with the tickets, candy and previews of good ol’ movie theaters.
Things aren’t quite as glamorous in the movie theater business, either. Movie theaters carry a lot of debt and only keep 50% of box office revenue — possibly less in some cases. Plus, the companies have more competition than ever, as entertainment is everywhere on screens of every size.
There’s everything from high-definition home theaters to Netflix (NASDAQ:NFLX) to the on-demand offerings of satellite TV companies like DirecTV (NASDAQ:DTV) and DISH Network (NASDAQ:DISH) and cable providers like Time Warner Cable (NYSE:TWC). Then there’s the Internet, where you can watch what you want, where you want, when you want.
But the good news, quite simply, is that everyone loves movies … so there will always be movie theaters. Plus, the profit margins for movie theaters have nothing to do with the content. Instead, it has everything to do with getting patrons to fork over ten times the cost of popcorn kernels while they watch that content. Popcorn and candy cost next to nothing to buy, and theaters sell them for a small fortune.
So all in all, the industry is doing okay … but not great. Attendance is still down 15% since 2002 and pricing power could start to wane thanks to the weak economy and aforementioned competition. Also, higher ticket prices for 3D films don’t always translate to the bottom line, because the licensing costs for these films are also higher.
With that in mind, if you’re looking to invest in movie theater stocks, you should tread carefully. Just like at the Oscar’s, not all contenders stack up equally. Let’s take a look at the winners and losers in the sector.
Winners
Regal Entertainment Group (NYSE:RGC) is the largest chain and the company enjoyed an 18% increase in revenue during the most recent quarter, along with a huge jump in earnings. Net income increased over ninefold, going from $4 million to just under $38 million. Attendance was actually up 15%, too, and the company purchased the Hollywood Theatres chain in the past month to expand its footprint. Regal’s dividend history is all over the place, and it paid out a special dividend last year like many other companies. At present, it’s set to pay out 5.5% this year, and that plus its solid cash flow makes it attractive for income investors.
Cinemark Holdings (NYSE:CNK) saw a 52% increase in net income on a 14% increase in revenue — making for a record of over $611 million — in the fourth quarter. It also saw a boost in attendance of 10% in the U.S., and an 11% increase in revenue internationally. Free cash flow has been increasing — from $52 million in 2009 to $108 million in 2010 to $207 million in 2011 and about $240 million in 2012. Plus, Cinemark pays a 3.1% dividend.
Losers
I would avoid Carmike Cinemas (NASDAQ:CKEC). Although it only has $300 million in debt, that debt is costing 11% annually in interest. Plus, the company has racked up losses three years running, and it doesn’t pay a dividend.
National CineMedia (NASDAQ:NCMI) is an interesting play, as it’s a joint venture by Regal, Cinemark and privately owned AMC Theaters. The company owns the advertising period before feature films. It has nice revenue and earns in the $30 million range annually. However, the economy is impacting ad sales. The company lost $500,000 in Q4 — well below the expectation of an $8.5 million profit. The company has a ton of debt, more than $800 million, and it pays out almost all its cash flow as a dividend (5.9% at the moment). One wonders at what point the company will pay down that debt, and it will probably have to cut that dividend to do so.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned securities.
