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April 25, 2006

Some Buy Ideas For Renewed Box Office Growth

It wasn't that long ago when almost everyday I was reading an article or a piece of research talking about the death of the movie business. Long-term decline in the box office is conventional wisdom these days, so it might come as a surprise for you to learn that so far in April, the domestic box office is up more than 30%. This followed a flat performance in 1Q06, which was an improvement over the horrible 2005.

Weekly box office has been up four consecutive weeks and the weekend only figures have been up five straight. I'd expect this positive trend to continue. Every single week the rest of this quarter compares to negative growth in the year ago period. The comps are actually quite easy as the remaining weeks in 2Q were down an average of 12% in 2005. These easy comps extend all the way until the end of August. In 2005, the period between late April and Labor Day had only two weeks with positive year over year comparisons.

The Hollywood year began on January 6, 2006 because the final weekend of 2005 contained the New Year's holiday. On a year to date basis, the box office is no up 6% in revenue. Pricing has not risen that much this year so attendance growth is positive. With easy comparisons and a good slate of movies for this coming summer season, growth of this magnitude or more could be in place through Labor Day.

There are only a couple of ways to play the renewed growth in the box office....

Regal Entertainment (RGC) is the cleanest and largest cap stock. Carmike Cinemas (CKEC) is the other large publicly held theatre chain. Imax Corporation (IMAX) is a different type of theatre company but would benefit from strong box office trends.

RGC has already had a big move, up from $19 to $21 this month. CKEC has lagged because of accounting issues that have caused its CFO to be replaced and its 10-K to be delayed. Analysts feel the resolution won’t be material but it has created enough concern to hold back the gains in the shares. IMAX has moved up sharply so far in 2006 as more mainstream films are being launched in its theatres day-and-date with the theatrical release.

Despite the gains, I think RGC can still be owned and might trade 20% higher if the box office strength holds. The shares are not priced about where private equity has valued the industry, so the upside is driven by operating momentum not multiple expansion. RGC also has a 6% current yield. CKEC is cheap, at a 25% discount to RGC and private equity value but it comes with the accounting issues. If you can get comfortable with those, CKEC is the best way to play the renewed strength in the box office.

Posted by Steve Birenberg at April 25, 2006 03:34 PM in Box Office