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November 17, 2006

Holiday Box Office Kicks Off This Weekend

This weekend marks the start of Hollywood's biggest box office period besides the summer. Led by the wide releases of the latest James Bond film, Casino Royale, and Happy Feet, Warner Brothers latest attempt to break into the big time animation game, Hollywood hopes to add a finishing kick to 2006's rebounding box office performance.

So far this year, the box office up 5.7% against the weak 2005 performance that has had industry observers worried about the impact of home theatres, shorter DVD release windows, high ticket prices, movie downloads, and alternative entertainment options. While I think those worries are overdone, it will be tough for the box office to show growth between now and year end as this year's turnaround actually began this weekend last year when the latest Harry Potter film opened to over $100 million. That was followed by holiday hits King Kong and Chronicles of Narnia: the Lion, the Witch, and the Wardrobe, which grossed $218 million and $291 domestically, respectively....

Another measure of the strength of last year's holiday season is the fact that 58% of the total 4Q05 box office of $2.2 billion was earned from this weekend onward. In 2004 and 2005, the holiday season brought in 54% and 52% of the fourth quarter receipts, respectively.

One more sign of the tough comparison is that the 4Q consensus revenue estimate for theatre industry leader Regal Entertainment presently calls for a decline of just under 1%.

Fortunately for the industry, the first half of the fourth quarter has been pretty solid with receipts up $50 million, or almost 5%. Strength so far this quarter is the result of good depth of well-reviewed product as a number of films have shown strong legs with weekly declines under 40%. Breadth of product will again be relied upon as this holiday season has no obvious $200 million plus blockbusters.

This weekend is a good example of what to expect. Casino Royale and Happy Feet have both received great reviews. The new Bond film has a 95% rating on RottenTomatoes.com and the penguins are pulling in a very good 80%. Despite the good reviews, industry estimates call for those two films to do combined business of $70-80 million, far short of the $103 million pulled in by last year's Potter film. Also expected to be strong this week are holdovers Borat (92%), Flushed Away (78%), and Stranger Than Fiction (76%).

The good reviews for Casino Royale and Happy Feet have both films in position to surprise to the upside and take a run at $200 million. If that occurs, the tough comparison for 4Q should not lead to a bloodbath and a return of negativism that dominated box office chatter for much of the past 18 months.

And if we get through the holiday season in decent shape, optimism will rise again in anticipation of next May when three of the biggest franchises of all time, Pirates of the Caribbean, Spiderman, and Shrek, each will be in theatres with the their third installment. 2QO5 had total box office of $2.4 billion. It is likely that those three films alone will produce box office of over $1.2 billion!

Against this backdrop, I am staying long Regal Entertainment. I get paid a 6% current yield which provides downside protection if this holiday season falters and puts something in my product as I wait for next May. RGC shares will also benefit if the highly anticipated IPO of their 41% owned in theatre advertising joint venture, National Cinemedia, goes off as planned later this year. RGC will use its share of the proceeds to deleverage, buyback shares, pay a special dividend, or some combination of the three.

Optimism about the box office will also help sentiment toward the Disney (DIS), News Corporation (NWS), and Time Warner (TWX), each of which owns one of Hollywood's major studios. These companies benefit mostly from DVD and merchandise sales. Disney and News Corp have been very successful at the box office this year but Time Warner has struggled mightily. Happy Feet could set the stage for a turnaround at Warner Brothers that will help reinvigorate overall corporate growth at Time Warner next year.

I think shares of all three of these conglomerates will continue to work higher. I am long DIS across my client base and have selected holdings of NWS and TWX. My order of preference is DIS, NWS, and TWX.

Posted by Steve Birenberg at November 17, 2006 02:42 PM in Box Office