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June 12, 2006

Cars Not Quite As Good As Expected; Overall Box Office Up Again

Cars opened at the low end of expectations with $63 million failing to provide a catalyst I had been counting on for Disney (DIS). I think the opening will hurt sentiment for DIS stock because it will make it easy for naysayers to get traction with the "they overpaid for Pixar" theme. However, DIS shares fell sharply late last week as expectations for Cars starting to come in so I don’t think there is a lot of downside left relative to the market unless the film drops much more quickly than expected at next weekend's box office or weekday grosses with kids now out of school are weak.

I am staying long DIS for Northlake clients because I think fundamental momentum is excellent with ABC, ESPN, the TV stations, the movie studio, and the theme parks all performing very well. Additionally, the shares could get another pre-opening lift ahead of the release of the summer's most anticipated movie, Pirates of the Caribbean: Dead Man's Chest , due in theatres on July 7th.

The overall box office was healthy again for the weekend, up vs. last year for the fourth straight weekend....

The top 12 films grossed 8% more than last year and all films in release were up 4%. Remember, $63 million is a huge opening and only for a Pixar film is that considered a disappointment. The weekend saw 5 films gross over $10 million with none of the leading films showing unusual declines. The top ten was filled with films appealing to all important demographic groups supporting my contention that if there is decent product the box office can still grow at its historic rate.

Year-to-date the box office is now up about 5%, with the second quarter tracking for a double digit gain. Comparisons remain easy for the next 6 to 10 weeks, so I am also sticking with my long position in Regal Entertainment (RGC). RGC went ex-dividend last week on its 30 cent quarterly payment. The shares are down about 5% before the dividend since I made the initial purchases for Northlake clients. I remain confident that a target in the $23-24 range is realistic as summer box office momentum sticks.

Posted by Steve Birenberg at June 12, 2006 09:57 AM in DIS