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August 07, 2006

Weekend Box Office Good For Regal

I didn’t get a chance to do a formal review of 2Q06 earnings from Regal Entertainment (RGC) due to my PC crash. The shares had a well deserved sell-off following slightly disappointing earnings despite a strong fundamental backdrop formed by 8% growth in the domestic box office during the third quarter.

Fortunately, this past weekend’s box office should help refocus investors from lingering concerns about RGC’s earnings to the continued strong recovery in the domestic box office. Led by Talladega Nights: The Legend of Ricky Bobby (TN), the weekend was up 18% vs. a year ago, leaving the current quarter more than 13% ahead of last year. If the rest of the quarter is just even with 2005, the 3Q box office will rise 8%, which is ahead of the assumptions used to build RGC’s 3Q estimates. Flat box office the rest of the quarter seems like a good bet given that next week should see another big gain as weekend two of TN and the opening weekend of World Trade Center will both likely beat last year’s # 1 film, Four Brothers. Comparisons do toughen, especially in late September, but there is a good chance RGC will see rising estimates within the next 90 days which should allow the share to recover all of last week’s losses. If that is the case, RGC will be back on track as a successful trade since by the end of September, investors will have collected two 30 cent dividends since I first got long in late April....

In other box office news, the weekend results confirm another problem for the Warner Brothers division of Time Warner as The Ant Bully fell 54% from its very disappointing opening weekend and Lady In The Water fell a disastrous 62% from its similarly disappointing opening weekend. Both films seem set to produce sizable losses on their theatrical runs. These results follow earlier box office and profit disappointments for Poseidon and Superman Returns. The fact that wrte-offs remain possible at Warner Brothers is less of an issue that the fact the company is looking at a very weak lineup for the home video window over the upcoming Christmas season. Home video is where the profits lie in and TWX is already witnessing a marked slowdown in its home video profits.

Lionsgate (LGF) investors will be disappointed with the $9 million opening for the company’s latest horror film The Descent. Given low production costs and the enduring strength of the horror genre on home video, LGF probably is not looking at a write-off but the studio has been without a hit since January’s release of Hostel. The Descent opened at less than half the take of Hostel.

Pirates of the Caribbean: Dead Man’s Chest was down to #3 this weekend but is showing good legs with weekly declines in the 40-45% range. The film remains on track to comfortably exceed $400 million in domestic box office and $900 million in worldwide receipts. This is good news for Disney (DIS), which reports Wednesday morning. DIS has the top two films of the summer in Pirates and Cars. Cars will end up with over $240 million domestic despite a weaker than expected opening weekend. These two films won’t contribute to DIS profits until the December quarter when both will hit the home video window. In fact, investors should beware of a timing mismatch in the June quarter when marketing costs for both Cars and Pirates will hit the income statement against just 21 days of box office time for Cars. I still expect DIS to report strong earnings and point to a healthy September quarter and sustained double digit growth in FY07 on its conference call.

Posted by Steve Birenberg at August 7, 2006 01:07 PM in RGC