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June 19, 2006

Box Office Continues To Strengthen

The box office was up for fifth consecutive weekend, led by a solid second weekend for Cars and respectable openings for three new films: Nacho Libre, Fast and Furious Tokyo Nights, and The Lake House. The Break-Up and earlier releases like X-Men and The Da Vinci Code continue to pull in moviegoers. Although the summer season is still without a major breakout hit, good depth of movies appealing to all demographics is proving that decent product will bring people into theatres. Don't read too much into my "lack of hits" comments, as two films have already grossed $200 million plus, two more have grossed $130 million plus and Cars is on track for around $200 million....

The summer comparison should improve over the next several weeks starting with the late June release of Superman Returns and followed by the July release of Pirates of the Caribbean: Dead Man's Chest. Summer movie strength should continue to provide a catalyst for Disney (DIS) and Regal Entertainment (RGC). I remain long both stocks and think each has 10% upside over the next few months.

Positive Estimate Revisions Are Likely For Regal

With just two full weeks left in the second quarter, the box office is up over 10% this quarter compared to the poor showing in 2005. I continue to see this as a greater revenue increase than currently assumed in analyst models for RGC. There are other variables besides box office including concessions and operating cost such as film splits and utilities but I think things are still shaping up for a strong quarter from RGC, which could lead to rising estimates that will get the stock price moving.

Investor Expectations Are Low

Year-to-date, the box office is up about 5%. Given ticket price inflation, this implies flat to barely higher ticket sales. Nevertheless, given the despair and negativity surrounding the box office coming off weak 2005 attendance, this is a good performance. It is probably not enough to lift the implied multiples for movie related revenues and EBITDA, but it should be enough to halt the multiple compression and allow stock prices to expand driven by growth in 2006.

Paramount Gets a Lift

Nacho Libre was released by the Paramount division of Viacom (VIA/B). Paramount has struggled recently so the solid opening is good news for VIA/B. The film had low costs, estimated at $35 to 40 million. With its gross likely headed for $70 million plus, this film will be nicely profitable as it moves through its windows.

Stiff Competition for Cars

Cars has been building its box office steadily as more kids are out of school. The film did well this weekend, falling 48% from it opening. Nacho Libre was targeted at young boys so Cars look pretty good to me. The competition still makes it hard for me to gauge where Cars will end up. It is pacing is behind prior Pixar films that came in around $250 million but most of those films were released in November. I expect Cars may finish around $200 million -- a great results by all standards but Pixar's. DIS shares bounced back strongly last week off a downgrade and the slightly disappointing Cars opening. News late in the week that ABC had wrapped up a decent upfront probably helped. The Pirates opening on July 7 is the next big news for DIS. Given that it is the most highly anticipated film of the summer, I think the stock will move up ahead of the opening.

Posted by Steve Birenberg at June 19, 2006 09:42 AM in RGC