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January 03, 2007

2006 Box Office Wrap-Up

Good breadth of popular movies appealing to all the major movie-going demographics allowed the box office to recover during the holiday season, pulling the fourth quarter to about breakeven with 2005 according to data from BoxOfficeMojo.com.

The final weekend of the year, including January 1st, saw box office receipts rise 15%, building on a gain of 6.8% in the prior week. The finishing kick allowed the fourth quarter to overcome a tough comparison in 2005 when three blockbusters (Harry Potter, Narnia, and King Kong) were released between Thanksgiving and Christmas.

For the full year, BoxOfficeMojo reports that domestic ticket sales rose 4% to $9.2 billion. Following the widely discussed weakness in 2005 when ticket sales fell almost 6%, the recovery suggests that the doom and gloom surrounding the theatrical movie business for much of the last two years was overdone. Internet downloads, home theatres, and alternative entertainment options all pose challenges but 2006 shows that depth of decent quality films will still bring customers to theatres....

Regal Entertainment (RGC) shares rallied to a new 52-week high in the closing trading days of 2006 as investors began to look past the tough finish to the year toward two major catalysts in the first half of 2007. First, the IPO of RGC's 41% owned joint venture, theatre advertising firm National Cinemedia, seems set for a 1Q debut. RGC will receive a significant cash infusion from the NCM deal which will be used to enhance shareholder value through some combination of debt reduction, share repurchase, and special dividends. NCM is expected to be good IPO. Second, box office comparisons ease through 2Q07 with three guaranteed blockbusters coming in May 2007: Pirates 3, Shrek 3, and Spiderman 3. Estimates surely reflect these high profile sequels but sentiment toward RGC shares still can improve further as May draws closer.

Movie exhibition is not a growth business but RGC has aligned its financial strategy with the best interest of shareholders by paying out most of its cash flow in regular quarterly dividends which provide the shares with a current yield of 5.6%. With the dividend as support, RGC can be winning investment when investor sentiment towards the movie business becomes less negative. We should be at one of those times now, setting up a potential 15-20% in RGC shares this year, most of which I expect to earn by the middle of May.

Posted by Steve Birenberg at January 3, 2007 11:08 AM in Box Office