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October 03, 2007

Fourth Quarter Box Office Preview

Earlier today, I provided a brief wrap-up of the excellent third quarter performance of the box office which rose at least 15%. Looking ahead to the fourth quarter of 2007, the comparison looks fairly easy although the lack of obvious mega blockbusters suggests only a moderate low to mid-single digit gain. For example, admissions revenue at Regal Entertainment is expected up in the mid single digits in the fourth quarter.

Last year in the fourth quarter, the domestic box office grossed $2.2 billion, unchanged vs. 2005. In fact, the fourth quarter box office has not grown since 2004. According to data compiled by Lehman Brothers and BoxOfficeMojo.com, there were seven films released in 4Q06 which grossed over $100 million, led by Night at the Museum with $250 million and Happy Feet with $187 million. In 2006, just 6 films crossed $100 million, while 2004 saw 10 films reach so-called blockbuster status.

Box office pundits expect 8 or 9 films to cross $100 million this year. However, there are no obvious home runs such as the big summer sequels with their built in audience. Among the most anticipated films form a box office perspective are The Golden Compass and I am Legend from Warner Brothers, The Bee Movie from Dreamworks Animation via distribution by Paramount, and National Treasure 2 from Disney.

For theatre stocks like Regal Entertainment, Carmike Cinemas, and Cinemark Holdings, the overall box office performance is a key factor driving the stocks. In theatre advertising company National Cinemedia is also sensitive to weekly box office trends. While I think that easy comparisons should lead to an up fourth quarter for the first time in several years, it does not look to me like there is much hope for a meaningful year-over-year increase. Coming off the big summer, momentum will slow significantly, something which is likely to occur again in 2008 as comparisons get really tough starting in May. Strong third quarter earnings reports and the potential for more dividend hikes, share buybacks, and special dividends, should provide near-term support for the theatre stocks but I am not as optimistic as I was earlier this year when I anticipated the big summer. Although it trades at a slight premium to its peers, I still like Regal Entertainment the best given its current yield of over 5% and the company's history of giving excess cash to shareholders via special dividends.

On the studio front, the key thing to watch is how this year's releases line up against the prior year. I see Disney, Viacom (Paramount), and Lionsgate as having the most favorable comparisons. Time Warner (Warner Brothers and New Line) and General Electric have neutral comparisons, while Sony and News Corp (20th Century Fox) have the toughest comparisons. Below are comments on Disney, Viacom, Time Warner, News Corporation on Lionsgate fourth quarter studio outlooks. I left off General Electric and Sony since those companies other business dwarf their studios.....

....For Disney, there is the potential for a big gain as the company had no $100 million grosser a year ago. National Treasure 2 seems likely to be a big hit as the first film grossed $173 million which is more than Disney's top two films combined in 4Q06. National Treasure 2 is not going to be released until December 21st so much of the box office will slip into Disney's March quarter but that should not dampen the profit potential of the film as it moves through its DVD and other windows during 2008. Industry observers are also high on the fantasy film Enchanted due for a Thanksgiving release. Disney's quarter is off to a good start as The Game Plan was a surprising number #1 this past weekend with a better than expected gross of $23 million. The Game Plan could match or exceed Disney's second biggest movie from 4Q06, Déjà Vu, which brought in just $64 million. While the box office comp looks favorable for Disney, the bigger influence on 4Q at the movie studio will be DVD sales of Pirates of the Caribbean: At World's End and Ratatouille. The comp is really tough vs. Pirates of the Caribbean: Dead Man's Chest and Cars. Further complicating matters is the huge success of Cars merchandise vs. the more difficult to market Ratatouille. Away from the studio things look good for Disney with theme parks, ESPN, and TV broadcasting expected to power the December quarter.

Viacom has already enjoyed a turnaround at Paramount this year which has two $300 million films, Shrek The Third and Transformers, and is the #1 studio so far in 2007. The Bee Movie, like Shrek The Third a Dreamworks release where Paramount distributes, is expected to be one the top grossing movies of the fourth quarter. Beowulf and The Heartbreak Kid are also potential hits. Last year, only Dreamgirls crossed $100 million for Viacom in the fourth quarter so this year is sure to be up. With the turnaround at Paramount aided by the likelihood that Transformers becomes a franchise that the studio has thus far lacked, investors will be more apt to bid up Viacom if ratings improve at its cable channels. However, on its own don’t expect Paramount to drive Viacom's stock price.

Time Warner has several potential hits this quarter including Fred Claus, The Golden Compass, and I Am Legend. I have seen lots of favorable expectations for The Golden Compass. Time Warner had two big films last year with The Departed ($132 million) and Happy Feet ($198 Million). As with Disney, it will be successful films released earlier this year that will tell the tale of the fourth quarter studio financial performance. The latest Harry Potter film, in particular, should sell 15-20 million DVDs this holiday season. A big quarter at the studio won't do much good for Time Warner shares unless confidence returns in the outlook for AOL and Cable, however.

News Corporation's Fox studio does not have any obvious hits set for the fourth quarter and faces a really tough comparison against last year's big hit Night At The Museum which was released on December 22nd and showed great legs in pulling in $250 million. Fox also had a hit last year in Borat which grossed $128 million. Fox does have The Simpson's Movie set for DVD which should be a big seller. Fortunately for News Corporation shareholders, the outlook away from the studio is really good with MySpace, the cable channels, and Sky Italia expected to drive 15-20% gains in operating income between now and the middle of 2008.

Lionsgate has had a tough run at the box office this year but recently released Good Luck Chuck has performed better than expected and looks like it could be the start of a better stretch. Lionsgate will benefit from a Tyler Perry film set for release this month. The two prior Tyler Perry films have pulled in a combined $95 million for Lionsgate but have been released in the March quarter, setting up an easy comparison this year. Lionsgate also brings Saw 4 this Halloween. Saw is the only really successful new horror franchise in the last few years. Horror has suffered through a big slump this year so it will be interesting to see if the Saw franchise has maintained its allure. Saw 2 saw a big jump to $87 million from $55 million for the original but Saw 3 fell back slightly to $80 million. I expect Saw 4 to continue the drop but the franchise should remain very profitable for Lionsgate. The company has a great track record of maximizing DVD revenue and using new releases to sell DVDs of older films. The Tyler Perry and Saw franchises have been great examples. Lionsgate shares have rallied 13% over the past two weeks largely on the back of Good Luck Chuck and optimism on the upcoming film releases. For a trade only, I think there is more room on the upside. Long-term, I do not like the company's complex accounting and volatility in quarterly results, although the company could be sold at ay time for a nice premium to current prices.

Posted by Steve Birenberg at October 3, 2007 04:26 PM in Box Office