Cinema: Stick to Tickets, Avoid the Tickers

by Lawrence Meyers | August 15, 2012 11:43 am

Despite any earnings reports to the contrary, the movie business is dying.

Since peaking in 2002, total box-office admissions[1] have declined eight of the past 10 years, resulting in a total decline of 20%. Box-office revenue is up 12% over that period, but if you back out 3D box office, total revenue actually has declined about 8%. Meanwhile, the average ticket price has soared 36%!

It doesn’t take a film historian to interpret these results. It clearly demonstrates that Americans are leaving the movies behind. Exhibitors are making up for volume decline via price increases, and the studios are playing along, using 3D as nothing more than a marketing tool. Just as it was used as a fad in the 1950s, it’s being used as a fad again. With the exception of Martin Scorsese’s Hugo, 3D is not intrinsically necessary to storytelling. Yet it justifies those higher average prices. Add in the other gimmick of IMAX (NASDAQ:IMAX[2]), and it’s clear the emperor is losing his shirt.

The reasons for this decline are part of a secular trend. First, it suggests that Americans are not impressed by Hollywood content. Second, we know that people are migrating to competing forms of entertainment, mostly on the Internet and blasting out of their amazing home theaters, thanks to wide selections offered by companies like Netflix (NASDAQ:NFLX[3]), Amazon (NASDAQ:AMZN[4]) and Coinstar’s (NASDAQ:CSTR[5]) Redbox.

Finally, take note of what teens are watching content on these days. They don’t distinguish between movies and iPhones. It’s all the same to them, and it’ll only get worse as older folks die off, replaced by those whippersnappers with their mobile devices.

None of these things are going to change. I’ve been in and around Hollywood for 20 years. Content is getting worse — and more expensive — and the center of the nation is being ignored when it comes to material they respond to.

So where does that leave investors with movie stocks? Interestingly, despite this ugly trend, there are ways to profit. With one exception, however, none offer compelling long-term capital gain opportunities.

Regal Entertainment Group (NYSE:RGC[6]) actually showed a 4% decline in quarterly revenues and a 10% decline in operating income, as one might expect given the noted trends. However, it is a cash flow-rich business. The primary reason for this is because RGC can buy popcorn on the cheap and sell it for seven times more than it paid.

Consequently, Regal pays a 6.1% yield. Its stock has traded in a tight range for over three years, thus fixed-income investors should feel relatively safe, as the company’s dividend is more than covered by cash flow … for now.

Keep a close eye on admission and pricing trends. Sooner or later, prices on 3D films and IMAX will fall because consumers won’t be willing to pay the premiums. When that happens, sell.

Also nice on the cash flow side is Carmike Cinemas (NASDAQ:CKEC[7]). However, its revenue isn’t going much of anywhere and it pays no dividend. I’d sell it if you own it.

Cinemark Holdings (NYSE:CNK[8]) is seeing more growth on the international side, but I’m not crazy-optimistic that growth will be driven by acquisitions going forward. However, as part owner of National CineMedia (the firm that shows all those ads before movies), it has a more diverse revenue stream. It pays a 3.5% yield and, again, that’s worth considering for income investors. This is probably the safest of the exhibitors.

Presently, however, I’d stay away from Dreamworks Animation (NYSE:DWA[9]). The only reason I say this is because it’s a pure play for motion pictures, and while it has an excellent track record, it’s small, so any one film that does fail could harm its balance sheet significantly. In addition, you are taking on too much risk for the potential capital gain involved, and you don’t have a dividend to tide you over.

My groundbreaking bearish article[10] on IMAX last year generated a lot of controversy — so much so that CEO Rich Gelfond even felt compelled to respond[11]. You’ll note the stock has never recovered since then, and I maintain my long-term bearish stance on IMAX. It’s not yet ready to be shorted, as its buildout is continuing. But be patient.

If invest in movies you must, then do it via Walt Disney (NYSE:DIS[12]). Here you get broad diversification across a classic media conglomerate that made two fabulous acquisitions with Marvel[13] and Pixar. This is where to go if you want a piece of the action.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.

  1. total box-office admissions:
  2. IMAX:
  3. NFLX:
  4. AMZN:
  5. CSTR:
  6. RGC:
  7. CKEC:
  8. CNK:
  9. DWA:
  10. groundbreaking bearish article:
  11. compelled to respond:
  12. DIS:
  13. Marvel:

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