Holiday Box Office Fizzles as Tough Comps Take Their Toll

Facing a very tough comparison driven by the $126 million open for Indiana Jones the Kingdom of the Crystal Skull a year ago, the weekend box office put in a reasonable performance, up 1.4% for the top 12 films for the 4-day holiday weekend. Analysts will give the weekend a pass but it fell modestly short of expectations as Terminator Salvation brought in just $54 million, as much as $20 million short of expectations. A slightly better than expected performance for Night at the Museum: Battle of the Smithsonian, #1 at $70 million, another strong hold for Star Trek, and an acceptable hold for Angels &Demons made up the difference.

I've been warning for weeks that box office comps were set to stiffen. I expect another tough comparison next weekend when the latest Disney/Pixar film, Up, opens against last year's big hit Sex and the City. Sex and the City's opening weekend of $57 million is right in the range of recent Pixar films including $63 million for Wall-E last summer and $47 million for Ratatouille in 2007.

The box office remains up 14% year-to-date and up 22% for the current calendar quarter but the gains seem likely to continue to moderate. As I warned, theater stocks began to reflect the tough comparisons a few weeks ago and have pulled back 10-20% off their highs with the exception of Carmike Cinemas which is being supported by takeover speculation since Mark Cuban filed an ownership interest in mid-April.

According to several recent analyst reports, theater stocks tend to lag the market in the summer in atypical "sell the news" strategy during the strongest season for the business. I think that will be the case again this year as comps continue to stiffen especially in July when The Dark Knight opened a year ago and gross over $500 million. Two July films this year have the potential to reach $300 million, Transformers: Revenge of the Fallen and Harry Potter and the Half Blood Prince. Neither looks set to reach anywhere near $500 million, however, which makes it unlikely the rest of the summer will support the year-to-date box office gains.

Taken together the two films will support international box office comparisons as each could bring in $700-900 million globally against the $1 billion worldwide gross for The Dark Knight. This will not help the theater stocks which are almost completely domestically driven.

At the studio level, the weekend was good for News Corporation which controls Night At the Museum and Viacom which has Start Trek. Angels & Demons is only doing OK business in North America but the international performance is quite strong so Sony has little to worry about from a profitability perspective. Terminator Salvation is split between Time Warner (North America) and Sony (International) so even if the film ends up disappointing the blow to profits for either company should not be too large. Time Warner was hoping to relaunch the franchise, much as Viacom did with Star Trek, but the opening weekend makes that look like a long shot. Overall, Time Warner's 2008 box office performance is a modest disappointment but fortunately, the company has a sure thing in Harry Potter coming this July.

Box Office Up Again But Story is Studios Not Theaters

Last weekend is a good reminder of why box office analysis is not as simple as it seems.

The overall weekend in North America was solid, up 5.4% for the top 12 films according to BoxOfficeMojo.com, the year –to-date comparison remains very strong at +15%. The summer season also remains strong, up 16.9% from the traditional launch on the first Friday in May. Thanks to huge numbers in April, the quarter is up 27.6%. For the theater owners, quarterly numbers are crucial as they directly flow through analyst earnings models to changes in estimates. Estimate change is one of the most reliable predictor of stock price performance.

What made last weekend odd is that most commentary will say that Angels & Demons was slightly disappointing, coming in at $48 million in North America. No one will complain how it lagged the opening for The Da Vinci Code by $29 million, as that was widely expected. But A&D was supposed to open at $55-60 million according to most prognosticators. So for the North America theater exhibitors, the weekend could have been a bit better.

For the studios, there is nothing to complain about. A&D had a huge haul outside the U.S., bringing in $104 million. This is replicating the success of The Da Vinci Code, which did an unusually high 71% of its business outside the U.S. A&D is not going to match the $217 million North American or $540 million international gross of The Da Vinci Code but it is likely headed over $400 million and into very profitable territory for Sony.

Viacom's Paramount studio also has be thrilled with the weekend. Star Trek fell just 43%, with Saturday grosses particularly strong. The data suggest favorable word of mouth and positive reviews are bringing ticket buyers out. Domestically, the film is headed well over $200 million. International grosses are very good so far for a franchise that is very U.S. centric and has played poorly overseas in previous films. There is little doubt Paramount has a winner: the film will be profitable and the franchise has been revived. Even better, despite the fact that Star Trek may gross $200 million less globally than Iron Man, which Paramount distributed in May 2008, the studio stands to make more money on Star Trek.

This coming weekend pits two very big films against one another: Terminator 4 and Night at the Museum 2. The films appeal to very different audiences so both should do fine. The only question is how high they can go. Both should be north of $50 million for the four day holiday weekend. Getting to $70 million each is not out of the question. I've even read some speculation that T4 could be $100 million over the holiday weekend including grosses beginning with midnight Wednesday. T4 is from Time Warner and Night 2 is from News Corporation.

The theaters will probably be happy with Memorial Day weekend despite the tough comp against the $126 million holiday weekend for Indiana Jones and the Kingdom of the Crystal Skull. This year's top two films should match that total and holdovers will likely beat the films in second through fifth place a year ago producing another up weekend.

Nevertheless, comps are stiffening and the box office story is widely known. Thus, I think theater stocks will continue to struggle as they have over the past few weeks. June and especially July will pull back the year to date and quarter to date box office gains leaving investors to wonder what the new catalysts will be for higher stock prices.

As usual, studio owner stocks are hit or miss. There is little direct flow through to financial performance as the movie business is not dominant at any of the entertainment conglomerates. Viacom seems most likely to get a boost thanks to Star Trek and later in the summer Transformers 2. Paramount has struggled for year so renewed strength can help investor sentiment for Viacom. Time Warner has had success with smaller films so far this year but its blockbuster season begins with T4. News Corporation is also off to a decent start this year with smaller films and Wolverine's grosses while not immense are good enough from a profitability standpoint. Night at the Museum is a critical title for NWSA and the early buzz is good. Disney has had a slow start to the year and has a relatively modest release schedule this year. Up, the next film from Pixar, hits theaters the last weekend in May. DIS investors will look ahead to 2010 and the release of Toy Story 3.

Box Office Boom Continues But Look Out Ahead

The box office boom of 2009 continued last weekend with the top 12 films up 30% vs. a year ago. Led by another surprisingly large opening in the #! Spot, the weekend was also helped by decent openings for other newcomers and good holds for hits form earlier this year. Year-to-date the box office is up 15.7%. All data is taken from BoxOfficeMojo.com.

Theater owner stocks have surged and studio owner stocks have benefitted from the unanticipated gain in ticket sales this year. Theater owners Regal Entertainment (RGC), Cinemark Holdings (CKEC), and Carmike Cinemas (CKEC), and cinema advertising leader National Cinemedia (NCMI) are all up huge this year. Time Warner (TWX), Viacom (VIA), and News Corporation (NWSA) are among the studios off to the best start this year. The gains have been consistent from week-to-week and profitability of the film slate for the studios appears to surprisingly good. SNL Kagan has positive profit estimates on many of this year's films. The only film likely to have produced a meaningful is Watchmen but the losses are spread among three entities (TWX, VIA, and third party financing) and should not noticeably impact film studio profitability in 1H09.

Not to throw cold water on the fire, but comps toughen considerably this coming weekend. Last year May saw huge openings and decent legs for Iron Man and Indiana Jones 4 and an surprisingly large gross for Sex and the City. The only May film from a year ago to significantly underperform what The Chronicles of Narnia: Price Caspian.

This summer season kicks off next week with X-Men Origins: Wolverine. Ghosts of Girlfriends Past should also pull in big bucks. The next weekend brings Star Trek, a prequel that remakes the franchise and has very good early buzz. Angels and Demons comes the weekend of May15th followed by Night at the Museum 2 and Terminator Salvation for Memorial Day weekend. The latest film form Disney/Pixar, Up, arrives the last weekend of May. This is an impressive lineup which seems like ti should at least hold its own against May 2008 but comps seems sure to slow which may spell an end to the upside for the theater stocks.

If you were fortunate to get long on these stocks earlier this year and can book gains of 50% or more, I'd definitely take at least a little off the table.

Disclosure: Time Warner is widley held by clients of Northlake Capitla Management, LLC including Steve Birenbegr's personal accounts.

Box Office Stays Red Hot

The box office boom continues. The top 12 films were up 61%. Led by Hannah Montana The Movie, a reasonable hold Fast and Furious, and good hold for Monsters vs. Aliens, The weekend was the best ever for Easter and the second best ever in April, trailing only last weekend. For years April weekends brought in $70-90 million. The past two weekends were almost summer like with $130 million and $148 million.

Year to date, BoxOfficeMojo.com now shows the box office up 14.6%. The next two weekends were typical $80 million April weekends in 2008 so double digit positive comparisons remain likely.

The first weekend in May is when the comparisons stiffen thanks to the popularity of 2008's Iron Man which opened to $98 million and went on to $318 million.

For the North American theater stocks, including Regal Entertainment (RGC), Cinemark Holdings (CNK), Carmike Cinemas (CKEC), and cinema advertising leader National Cinemedia (NCMI), the box office boom is nothing but good news. Estimates should continue to rise for the group and stock prices will likely follow until summer comps falter or the inevitable flops arrive.

For the studios, it is always a film-by-film issue with profitability through all windows what matters. International box office and DVD volumes are especially crucial.

This past weekend, Disney (DIS) got a much needed boost form Hannah Montana. The studio has been in a slump lately and DIS is the most content driven company in major media given how it moves product through its cable networks, theme parks, and retail stores.

Dreamworks Animation (DWA) got some relief as well with a Monsters vs. Aliens dropping just 31%. The domestic run now looks like it will get close enough to $200 million that it should match analyst estimates. The issue remains overseas where the film is sharply lagging the last DWA films and analyst estimates. I also remain concerned that DVD sales could suffer from the 3-D hype which is can not be duplicated in the home.

Nothing critical from the rest of the studios on the weekend. All are in pretty good shape this year as only Watchmen from Time Warner (TWX) looks like a sizable money loser. Fortunately, the rest of the TWX slate, especially Gran Torino has compensated.

Profits Not Box Office Matter to Movie Studios

The box office boom is clearly a plus for theater owners how collect about 45% of ticket revenues and get more high margin concession sales. For studios, the boom is not clear cut. It depends on which studios and are producing the hits and most importantly, the profitability of individual films and the overall annual slate.

UBS analyst Mike Morris, a buddy of mine, noted in a report this week that the 1Q box office gain of 9.5% was generated by 109 films vs. 158 in 1Q08. Clearly, studios are trying to cut slates, save money on production and marketing, and cut overhead. I think the new approach offers modest potential to improve profit margins and consistency but it is mostly a reflection of the new reality of lower DVD sales and uncertainty over future digital revenue streams.

NWSA and DIS have been best historically. TWX has been mediocre but seems to have learned some tricks in the last 18 months. VIA lags. LGF is a pure studio but has had issues with controlling costs as its slate has grown and bigger budget films have been added.

Box Office Accelerates Furiously

The box office boom kicked into top gear this weekend as Fast and Furious opened to $72.5 million, shattering expectations and the prior record for April. According to BoxOfficeMojo.com, the weekend was up an astounding 89.8% for the top 12 films. The top two films pulled in $106 million, up 10.8% from the entire slate of 128 films a year ago. The box office is no2 up 12.6% in 2009, a figure well ahead of analyst estimates at the start of the year.

Not surprisingly, shares of movie theater stocks have been market leaders since this year. Regal Entertainment (RGC) is up 42% and Cinemark Holdings (CNK) is up 32%. In theater advertising company National Cinemedia (NCMI), in which RGC and CNK have significant ownership stakes, is up 42%.

Comps remain easy through April but stiffen as the summer season kicks off the first weekend in May. Last summer was surprisingly strong with many films finding audiences consistently throughout summer. This summer's slate compares well but keep in mind that The Dark Knight grossed $500 million last summer and ranks #2 on the all-time domestic list.

Many analysts raised estimates for theater stocks last week and more estimate increases are on the way. Rising estimates correlate well with rising stock prices so look for further gains in RGC, CNK, and NCMI. There are very few companies with rising estimates given the economy so money managers will find it hard to resist the group. Until comps slow or turn negative. But that won’t happen until May at the earliest.

At the studio level, Fast and Furious belongs to Universal, which is owned by GE....

Fast and Furious has a rumored production budget of $80 million. Marketing may be another $50 million but the studio should easily recoup those costs from its 55% of the worldwide gross which will surely be north of $300 million. Revival of the franchise should boost DVD sales of the first three films which along with decent sales for the new film should make the picture extremely profitable for GE. GE is a huge company so the financial benefits may not be material but they certainly are a bit of positive news for the troubled conglomerate.

The #2 film this weekend was Monsters vs. Aliens from Dreamworks Animation (DWA). MvA fell by 44%, a strong but not outstanding hold. The film is slightly lagging Ice Age 2 which went on to gross $195 million in North America. $180 million is acceptable for DWA shares but falls short of the $200 million plus I believe is necessary to boost DWA shares. The international rollout remains mostly ahead of MvA. It could change my opinion in either direction. No data on how 3-D performed relative to 2-D on the second weekend.

Movie Star Salary Control Just One Way Studios Are Coping

On Thursday the Wall Street Journal ran a major story discussing how the Hollywood studios are trying to cut back on the huge payouts to movie stars. David Poland of the Hot Blog and Movie City News did a follow-up which linked to articles by Gabriel Snyder at Gawker and Kim Masters of The Daily Beast.

Anyone interested in movies, especially the business of movies, should read all four articles. The gist of it is that Hollywood is trying to crackdown on costs and improve the risk-reward tradeoff on movie production. The weak economy, loss of hedge fund financing for movie slates, decline in DVD revenue, and uncertainty over revenue streams from various digital technologies is driving the studios to try to increase margins. The first step has been to cut back on the number of productions and focus on larger films with higher box office and profit potential including international success. For example, Disney is down to 13 films this year from about 20 a few years ago.

A second step was trying to return the independent film business to its roots. Over the last few years, the major studios invaded the indie business which led to a lot more indie films with sizable production and marketing budgets. These indie studios have now been mostly folded into their parents.

Traditional cost cutting is also at work with layoffs and other cutbacks.

With the box office coming off two good years and off to a great start this year, I think this WSJ article helps to improve sentiment towards the studio owners which include Time Warner, Disney, News Corporation, and Viacom.

Key points from the WSJ and follow-up articles are that studios are trying to move major stars from points off the top of studio box office take (a bit over 50% of global box office – the theaters get the rest) to a percent or flat rate after the studio recoups marketing and production costs. The details in the Gawker column about how actors are paid are a must read for investors interested in movie studio stocks.

The bottom line is that box office gets the ink (including a lot of my own) but what really matters is studio level profitability on their annual slate of films. This is especially important for Viacom and Time Warner where the studios are a much higher percentage of revenue and cash flow.

Part of the reason I am long the new Time Warner is that Warner Brothers is a traditionally successful studio and has taken a lot of strides toward the Disney and News Corporation model, which has produced industry leading margins and profits the last five years. On the other hand, Viacom's Paramount studio has been in a multi-year slump for films where it owns the intellectual property and has a ways to go to rebuild the profit engine.

Monsters vs. Aliens Scores in 3-D Adding Bull Fuel to Movie Stocks

Monsters vs. Aliens met expectations with an opening weekend gross of $58.2 million. The box office also benefitted from a surprisingly strong opening for The Haunting in Connecticut. With these two films driving the weekend, the two week slump is over as the weekend was up 52.5% for the top 12 films according to BoxOfficeMojo.com. 2009 is off to a great start with a 10.2% gain and theater stocks have responded with the two largest chains, Regal Entertainment (RGC) and Cinemark Holdings (CNK), up 91% and 41%, respectively, from their 52 week lows. I think there is more room to run as comparisons remain easy and the release schedule remains favorable through April.

The big story for the weekend, however, will be the big opening for Monsters vs. Aliens which apparently got a nice assist from the 3-D showings. According to variety, 3-D ticket sales were 58% of the total despite representing just 28% of the screens.

Assuming that the average regular ticket price was $6 (lots of matinees and kids) and that 3-D tickets had a $3 premium, the average ticket price was $7.74, providing a 29% boost to the box office per ticket sold. Using this math (which is a guesstimate), total ticket sales would be about 7.52 million, providing a boost to the box office of about $13 million. Subtract $13 million from the opening weekend gross and Monsters vs. Aliens would have an opening weekend gross in line with the two other big opening, non-sequel, spring cartoons, Ice Age ($46.3 million) and Dr. Seuss' Horton Hears a Who! ($45 million).

In this sense, the opening of Monsters vs. Aliens is going to generate favorable headlines for 3-D films. Many more are in the pipeline so investors in theater stocks and producers of animated films (Dreamworks Animation and Disney) should get a boost.

Another way to look at it is that DWA's rumored production budget of $170 million had an extra $15 million in costs related to having a 3-D version of the film. Studios typically collect 70% or more of opening weekend ticket sales so Monsters vs. Aliens may recoup the additional investment for DWA is the first two to three weeks of North American distribution.

I still think it is too soon to call Monsters vs. Aliens as a clear hit, big money maker, and game changer for 3-D. We have to see how the legs are on the second weekend. We also have to see if the 3-D ticket price premium negatively impacts repeat viewing. Also, the film will have a phased opening abroad to coincide with spring school vacations in different countries. Animated filmed often produce 60% or more of their worldwide gross outside of North America. Finally, as every future animated film is released in 3-D and the number of 3-D theaters expands, the ability to hold a premium ticket price is an open question.

However, the early bottom line for the 3-D experiment is positive. This should cheer investors in movie related stocks who have had little to be excited about recently.

For more discussion of Hollywood and Wall Street, check out SNL Kagan's new blog, The Dow of Steve, set to make its debut this week.

Box Office Cooling Won't Last Much Longer

The box office continued its cooling trend as the weekend was down 1.5% for the top 12 films according to BoxOfficeMojo.com. This marks the second consecutive down weekend following almost three months of positive comparisons. Year-to-date, the box office is now up 9.9%, well off its peak growth, but still a very good comparison that exceeds analyst comparison for the first quarter entering year.
Next weekend is the final one of the quarter and it should be up big driven by the debut of Monsters vs. Aliens from Dreamworks Animations (DWA). I sense that expectations are coming in a bit. Anything short of $50 million will be a disappointment though that will be enough to drive a positive comp for the total box office. A big opening in the $60 million plus range will be great news for theater stocks and DWA.

April is a notoriously slow month for the box office before Hollywood's summer season kicks off on the first weekend of May. Looking over the release schedule, I think April should comp positively, especially if Monsters vs. Aliens tracks toward $200 million in North America.

As noted the growth this year is unequivocally a positive for theater stocks which responded well when the market rallied. The theme that the box office is recession resistant is pretty widely accepted now which should support further gains for Regal Entertainment (RGC) and Cinemark Holdings (CNK). National Cinemedia (NCMI) , the leading in-theater advertising company, also benefits from box office growth but the stock is too expensive for new money commitments after more than doubling off its October/November lows.

For the studios, as usual the news is mixed. Time Warner's Watchmen now looks like a money loser, tracking to just $100 million domestic and no more than that abroad. Barring unusually high DVD and merchandising revenue, the film looks like it will produce losses in the tens of millions for TWX). Fortunately, the rest of TWX's late 2008 and early 2009 releases are performing quite well so I think estimates are secure. Nevertheless, the full year estimate for the Filmed Entertainment has little cushion now, especially against the tough comp from 2008 due to The Dark Knight....

The early winner with what is shaping up to be a big year based on easy comps a strong release schedule is News Corporation (NWSA). Lionsgate (LGF) also is off to a good start but it needs another good opening for horror film The Haunting in Connecticut this coming weekend to overcome other issues that led to very poor guidance for losses in 2009.

TWX remains my favorite stock among the diversified entertainment conglomerates. TWX will receive its $9 billion dividend from recently spun off Time Warner Cable at month end followed by a 1 for 3 reverse stock split. The new TWX is a pure content company with positive operating moment in 2009 in its two largest business segments, Cable Networks and Filmed Entertainment. AOL and Publishing remain very weak but I think balance sheet strength provides an offset as would a divestiture of AOL which seems more likely given the recent hiring of a new business head from Google (GOOG).

Sundance 2009

I went to the Sundance Film Festival for the second year whereI saw eight films over two days. If I had a longer stay I would cut down to three films a day. One of the films was a series of shorts. Of the other seven, my son, a junior at NYU studying music composition and film scoring, and I agreed that six at least lived up to our expectations.

We agreed with the consensus that Push: Based on the novel by Sapphire, was the best of the fest. The film won both the jury award and audience award for U.S, Dramatic films. It is a tough but uplifting story of an overweight, illiterate 16 year old African-American girl growing up in Harlem. Rumor has it that Lionsgate (LGF) is in the pole position to buy the film which would make sense given its success with the black audiences and upscale white audiences with the Tyler Perry movies and 2005 Best Picture winner Crash.

The other film we really enjoyed was Peter and Vandy, a romantic comedy chronicling the relationship of a young couple. The story jumped around chronologically which worked well as you got to know the characters intimately and appreciate both the ups and downs of their relationship. I thought the acting and script were excellent and the depictions of the little things that make up a relationship were very realistic. I hope the right studio buys the film and markets it well as it deserves to be seen by a wider audience.

We also enjoyed, Dare, a teen drama/comedy, Moon, a science fiction story about cloning, and two foreign films, Bronson and Carmo. Moon was sold to Sony and features Sam Rockwell in the lead and Kevin Spacey in a supporting role voicing a robot. Bronson is an adaptation of the violent tale of Britain's most notorious prisoner and has an incredible acting performance in the lead role by Thomas Hardy.

The only film we felt missed the mark was Toe to Toe, a teen drama about race relations in a Washington DC prep school.

If you love movies, I'd strongly encourage you to take a trip to the Festival. The films are generally quite good and the sense of community among those in attendance creates a very positive vibe.

Slow Sales at Sundance So Far

While you are reading this I'll be heading to O'Hare to hop a plane to Salt Lake City on my way to Park City and the Sundance Film Festival. The Festival started last weekend with many questions surrounding the market for films given the economy and major cutbacks at the Hollywood studios. As though the economy is not bad enough, over the past six months most of the major Hollywood studios have eliminated or folded in their specialty divisions that were focused on independent films. Over the past five years, these specialty studios (e.g. Warner Independent Pictures, Paramount Vantage) became dominant players in independent film as they took the lead in acquiring films at Sundance and other festivals.

Over they years, Sundance has become more and more of a buyers festival. As a result, heading into this year's festival even more than the usual number of articles have appeared about the state of film buying market. Overall, expectations were low heading into the festival. After reading many fresh reports about the festival so far, it appears that film buying got off to a slow start and has picked up slightly. There have not been any big deals (greater than $10 million so far) with the highest deal in low to mid-millions for Brooklyn's Finest, a cop drama.

I offer these comments as an insight into the economy and the thinking of companies with great exposure to consumers. Cautious spending is to be expected given the environment but it is also confirmation of what the major Hollywood studios and their parents (DIS, NWS, VIA, TWX, GE) think of the outlook.

If you are interested in following Sundance, both the films and the film buying, Movie City News is providing fantastic coverage at its 10 Days of Sundance section. Special thanks to David Poland for all his efforts on this project and at Movie City News.

Box Office Surging

The expected surge in the fourth quarter box office is back on track after an interruption for Halloween falling on a Friday night. Madagascar 2 brought in a better than expected $63 million and Role Models surprised with $19 million to push the weekend box office up 32% from a year ago for the top 12 films according to data form Box Office Mojo. The box office is now up 7.5% this quarter and in positive territory for the year.

As outlined previously, in 2008 the box office fell for 12 consecutive weeks from late September through early December. We are now about half way through that period with the 7.5% increase. The comps should improve dramatically the next two weekends. This coming weekend is the debut of the new James Bond film, Quantum of Solace. Quantum is already open in several overseas markets and is shattering box office records. Last year the #1 film on the comparable weekend brought in just $27 million and the top 12 for the whole weekend was $92 million. Quantum is going to bring in well over half of last year's entire top 12 all by itself. Madagascar 2 and Role Models have no com[petition in their genres and should hold well despite the massive expected turnout for Bond....

....The next weekend should also be up huge featuring the debut of Bolt, an animated film form Disney, and Twilight, a vampire film based on extremely popular novels with teen girls. True Blood, an HBO series about vampires is doing quite well in the ratings which will also give Twilight a push. The #1 movie the same weekend a year ago did $34 million, a total that should easily be surpassed by Twilight ($50 million plus?) and the second probably by the second weekend of Quantum of Solace.

The most direct plays on the box office surge are movie theater operators Regal Entertainment, and Cinemark Holdings. National Cinemedia the leading in theater advertising company, is another play. Regal yields 12% and goes ex-dividend on December 8th. With that 3% in your pocket if you hold through that day and the surging box office in providing a tailwind, the shares represent an interesting long idea for the next 30 days.

The beginning of November marks the start of the second biggest season of the year for Hollywood so I'll be back with regular updates most Monday's for the rest of the year.

Weekend Box Office Finally Up - Start of A Trend?

I spent all weekend hitting refresh on my browser monitoring the news on Lehman, AIG, and Merrill Lynch. Apparently a bunch of Americans decided to do something else: go to the movies.

The weekend box office rose 35% from a year ago, breaking a seven weekend losing streak. The last up weekend was the opening one for The Dark Knight, back in mid-July. Given the massive numbers produced by Batman, over $517 million so far in North America, the long losing streak is a reminder that most recently released films did not find big audiences and that the second half of the record breaking summer of 2007 was unusually strong.

Last weekend was the best ever for the same September weekend by about 20% as four films grossed at least $10 million. All of the films were adult-oriented but their demographics differed enough to give each a chance to find an audience.

The big weekend could be the start of good run for movie theatres....

Last year saw a 12 week run of negative comps that began the last week in September and extended through mid-December. With this week's top four likely to have some staying power in a slow part of the year and a decent releases slate between now and mid-December, it is time to take another look at Regal Entertainment (RGC), the leading domestic theatre chain.

Quarter to date the box office is down just 2% giving RGC a decent chance to meet consensus revenue estimates that call for a flat quarter. Easy comps and an extra week means growth should return in 4Q. RGC shares are trading near their 52 week low thanks to Hollywood's seven weekend losing streak which might make it a good time to step in for a trade. While you wait, the current yield is 8%. I'll be brushing off and updating my RGC model this week.

Weak Finish Overshadows Strong Summer Box Office

It looks like a weak finish to the summer box office will leave Summer 2008 just short of Summer 2007's all-time record. Labor Day weekend is down 22% for the top 12 films likely making it five straight weeks of negative growth. According to my data, pulled from BoxOfficeMojo.com, from the first weekend in May through Labor Day, the box office fell 0.4% vs. a year ago.

This is actually a very impressive performance that is well ahead of expectations as 2007's all-time record looked like an extremely high hurdle given three $300 million films in May 2007 and an unusually strong July and August. I had been expecting a mid-to-upper single digit decline for the summer with the possibility that 3Q08 could be down as much as 10%. 3Q is presently down a bit less than 3%....

....The better than expected performance can be seen in the charts of the major theatre stocks. Regal Entertainment, Cinemark Holdings, and National Cinemedia are all up between 10% and 20% from their lows made earlier in the summer.

4Q08 comps are pretty easy, especially in the Thanksgiving through New Year's time frame. Positive comparisons seem quite likely for 4Q even though a can’t miss blockbuster, the 6th Harry Potter film, was moved from November to summer of 2009.

I think that the combination of recent stock strength and a less positive 4Q limits the upside for the theatre stocks. However, should the stocks move toward their summer lows, I think an excellent trading opportunity would be in place with downside supported by healthy current yields (RGC – 7.2%, CNK – 4.9%, NCMI – 5.7%). The growth story in the group is NCMI which has a troubled 2008 but should return to double digit growth in 2009 as theatre advertising resumes its market share gain of the advertising pie.

Summer Box Office Update: Better Than Expected But...

It's been awhile since I provided an update on the domestic summer box office. Relative to my initial expectations it continues to shape up well. Since the first weekend in May, Hollywood's official start to summer, the box office is unchanged from 2007's all-time record. Given my expectations, including particularly tough comparisons in July and August, this result is very favorable. Theater stocks have responded with Regal Entertainment (RGC), Cinemark Holdings (CNK), and National Cinemedia (NCMI) rising 15-30% from their summer lows.

Two factors led to the better than expected performance. First, May and June performed strongly with a wide array of films attracting ticket buyers. With three films from May of 2007 bringing in over $300 million, 2008's breadth of successful films was welcome relief. Second, and most importantly, The Dark Knight is headed to #2 all-time in North America with over $500 million. This figure is at least $200 million ahead of the most optimistic estimates. Without that extra $200 million, the summer box office would be down 5%!

Unfortunately for theater stocks, 4Q08 is no longer shaping up as positively as expected....

....Time Warner's decision to move the next Harry Potter film from a November 2008 release to the summer of 2009 is taking a certain $250-300 million film out of the holiday box office. Other major releases will pick up a good part of Harry's ticket sales but the big upside momentum from easy 4Q comps (analyst estimates for 4Q for RGC and CNK call for double digit revenue growth) is now less likely limiting the trading upside I had foreseen for theater stocks late this fall.

For TWX, the move of the Potter film to 2009 is probably a good thing. It provides a nice cushion for 2009 estimates, especially in 4Q09 when DVD sales will hit. Another beneficiary could be Dreamworks Animation (DWA) whose next film, Madagascar 2, will now have more to run with family audiences.

Batman Saves Gotham and Hollywood

It's been kind of hard to miss the news on the record breaking opening of The Dark Knight but I'll try to put my usual Wall Street spin on the numbers.

The Dark Knight's $155.4 million is the best ever three day opening, beating Spiderman 3's $151.3. The Dark Knight also set a single day record on Friday and broke the midnight showings record. With Mamma Mia opening well at $27 million and several holdover films such as Hancock, Journey to the Center of the Earth, and Wall-E holding up very well in the face of the Batman onslaught, the weekend was also Hollywood's best ever non-holiday three day haul besting the opening weekend for Pirates of the Caribbean: Dead Man's Chest on July 7-9, 2006.

The weekend top 12 gross of $250 million was over $100 million of the same weekend a year ago. That is enough to bring the summer back from over a 3% deficit vs. year ago to just $16 million shy, or about one half of one percent. The quarter which was down 17% entering the weekend is no down around 5.4%.

I still expect a down summer and a down quarter but my prior prediction of a July/August dip of 10% looks steep with The Dark Knight likely to have good legs and maybe pull in $400 million....

Comparisons from here on out are real tough for the rest of the summer thanks The Bourne Ultimatum ($$227 million), The Simpson's Movie ($183 million), Rush Hour 3 ($140 million), and Superbad ($121 million). Besides the legs on The Dark Knight other films yet to open with a lot of box hype include The Mummy: Tomb of the Dragon Emperor, Pineapple Express, and Tropic Thunder.

In anticipation of the monster opening for The Dark Knight shares of Regal Entertainment rose over 2% on Friday and 9% for the week. Other theatre stocks also rallied hard with Cinemark Holdings up 11% and in theatre advertising giant National Cinemedia up 8% from its all-time closing low last Monday.

I'd expect some early strength off The Dark Knight opening for each of these stocks but I'd sell or short into upside in all three. I think one more dip in these shares is coming before a rally based on what a very promising winter holiday lineup against easy comparisons and a weak holiday a year ago.

The Dark Knight belongs to Time Warner which also has modest hits in Journey to the Center of the Earth and Get Smart. I'm not sure about the economics of The Dark Knight with DC Comics and Legendary Pictures likely participating at a high level. The film is rumored to have cost $180 million but there is some speculation that the marketing budget was held in check thanks to the incredible coverage the film was getting in the mainstream press due to the presence of the deceased Heath Ledger (FWIW, I saw the film on Saturday afternoon and would give it an 85 but when Ledger was on the screen in his talkative and contemplative moments I'd give him an A+). The bottom line for Time Warner is that The Dark Knight is putting a huge exclamation point on what is shaping to up be a very good year at the box office for the company's studios. With Time Warner Cable soon to be split off and rumors of a deal involving AOL getting much hotter Time Warner is becoming a content company again and it couldn't ask for a better start in its new strategic direction.

Nothing else critical at the studio level this weekend although News Corporation seems sure to face a modest write-off for Meet Dave which has not even grossed $10 million through two weekends. Fortunately, in the current quarter, News Corp has great strength in highly profitable DVD sales which will drive favorable comps in its studio segment.

I'd love to hear what other friends and clients of Northlake thought of The Dark Knight. Go ahead and post your opinions in the comments section or pop me an email. If I get enough responses, I'll post a follow-up comment later this week.

Box Office From The Studio Perspective

Last weekend, the #1 film came from NBC Universal (I wrote up NBCU and its impact on parent General Electric on Monday). Hellboy 2: The Golden Army had a strong opening, exceeding its predecessor. The film looks headed to a total domestic run of over $100 million. I did not realize this until reading it on FantasyMoguls.com but assuming that Hellboy 2 makes it to $100 million that will be three straight films form the studio crossing $100 million (The Incredible and Wanted, both released in June, already are over $100 million). The studio's next film, Mamma Mia, is being released this coming weekend and observers also believe it can reach $100 million. The next NBCU film, The Mummy: Tomb of the Dragon Emperor, is a sure thing to make $100 million. That would make five consecutive releases crossing $100 million. According to Steve Mason of FantasyMoguls.com, this would be the first ever instance of that happening to any studio. For NBCU/GE, this is all good news which is helpful given a slowdown in advertising that is just beginning to bite national TV and NBC's status as last place in primetime.

For other studios, the news is generally good. Disney is getting good mileage out of Wall-E, although the numbers are not tracking considerably ahead of Cars or Kung Fu Panda. I suspect that Wall-E will have better legs and look for it to go comfortably north of $250 million in North America. With the latest Narnia film severely underperforming its predecessor, this is good news for Disney which needs hit films to drive all its other businesses....

....Kung Fu Panda crossed $200 million and looks headed to $220 million. The story now is how many screens it can keep as it has been in theatres since early June. The film brought in a respectable $4.3 million last weekend. I remain long Dreamworks Animation as I believe that estimates are too low due to the success of Panda in both North America and aboard.

There was one loser this weekend. Meet Dave, the latest Eddie Murphy film, was his worst opening ever. The film grossed just $5.3 million despite a wide release and heavy marketing. At a rumored production cost of $60 million and a marketing budget likely in the same range, a writedown is possible for 20th Century Fox, owned by News Corporation. Fox had a small summer planned and now one of its films has bombed. Six months form now this will pressure studio results as the future windows are bereft of popular product. It's a small part of News Corp but not a helpful development given the collapse in the stock over the past several months.

Wall-E Drives Cleans Up The Box Office

A whirlwind weekend had me all over the place so just a brief comment on another great weekend for the box office this morning. But first, major props to Providence, RI where I dropped my daughter off for a summer in the Early College program at Rhode Island School of Design. The city has done a fantastic of development, preserving the incredible wealth of historic buildings and using the river as a focal point for civic activity.

I took my daughter and her older brother to Wall-E for a Friday matinee. The film is every bit as good as the reviews. Hopped on a plane to Providence first thing Saturday morning, back to Chicago by noon on Sunday where I got in my car and drove 8 hours to my place on Lake Superior in Northern Wisconsin. Looking forward to some slower time to start the new quarter. Hopefully some space, peace, and quiet will allow me to do some good thinking about the very difficult market environment.

As expected, Wall-E led the pack with a solid $62 million, meeting expectations. It was the third best opening for a Pixar film and reversed a two film trend of declining opening weekends for Pixar. The film opened slightly better than Cars and with stellar reviews (look for talk of a best picture not best animated picture nomination) and indications it is playing beyond families with younger children I think it could go north of Cars $245 million....

....The surprise on the weekend came from Wanted which crushed expectations and pulled in $50 million. With two openings so large, the weekend was up 22% for the top 12 films according to BoxOfficeMojo.com. That is enough to bring the year to positive territory for the first time in months. The quarter also ended up vs. a year ago despite tough comps with June powering 17% ahead of 2007, a gain of $150 million.

With a bunch films with good legs and strong word of mouth and a big opening anticipated for the new Will Smith film on the holiday weekend, look for the box office strength to continue. Comps remain very tough in July and August but the summer is shaping up better than expected which makes the theater stocks intriguing for a trade after the huge drubbing they have taken in the past several months. A few analysts upgraded Regal Entertainment last week on just such a theory. I think the stocks bounce now but will pullback again when comps go negative again later in July so I'd hold my fire unless you are a short-term trader.

Northlake is long and have been recommending Dreamworks Animation I want to mention that Kung Fu Panda fell 46%, a little worse than I was hoping for but understandable given the direct competition from Wall-E. It is now running about $3 million behind Cars which grossed $244 million. I think it gets north of $220 million (I have a bet on that with one of the street analysts who is cautious on the shares). North of $220 means estimates must continue to rise so I think the market and Wall-E induced weakness in DWA late last week sets up a buying opportunity.

Box Office Remains Healthier Than Expected But...

The box office rose for the fourth consecutive weekend with the top 12 films up 9.7% according to BoxOfficeMojo.com. Every weekend in June has been up bringing the summer to a 2.6% gain. Quarter-to-date the box office is still down 2% due to a very weak April.

Comps stiffen considerably starting this coming weekend but until the middle of July the release schedule should provide enough oomph to keep the box office close to year ago levels. From mid-July onward, it would not surprise me if weekly comparisons fell by double digits as last year had some unusually large hits in what historically has been the weakest part of the summer.

Movie theatre stocks broke to substantial new lows last week with additional losses of 4% or more added on yesterday. Besides putting the best part of the summer season beyond them, the stocks may also have taken a hit on a negative analyst comment regarding Regal Entertainment's concession sales.

Theatre stocks look cheap and dividend support is getting significant. RGC's current yield is now 8.25%. Cinemark Holdings, the other quality play, yields 5.50%. To perfect a bullish, contrarian setup, I'd like to see the stocks weaken a little further on weak late July and August box office. At that point the stocks would be at 52-week lows, estimates would have been cut, yield support would be even stronger, and most importantly, the next big season ahead, Christmas, offers the possibility of big gains against a weak performance in 2007.

On the studio front, last weekend offered little new tradable information. The #1 movie was Get Start from Time Warner. The film did fine but will not have a meaningful impact on expected financial performance for the company. The #2 film was Kung Fu Panda. The decline of 35% in its third weekend is a good hold and the film remains on track to gross $220-240 million, ahead of analyst estimates. I think estimates could rise following next week when analysts see how big a hit Panda takes from the new Pixar/Disney film Wall-E. A decline of less than 40% from last weekend's gross would be good news....

....The #3 film was The Incredible Hulk. The drop of 61% was about as expected. Hulk is owned by Marvel Entertainment. MVL shares have pulled back from recent highs. I except good 2Q earnings and optimistic discussion of the business but I don’t see any other catalysts with the big summer releases out of the way. Some further pullback to fill the early May gap from $30 to $33 off MVL's Iron Man opening seems plausible.

Finally, last weekend had one disappointment as the latest Mike Myers film, The Love Guru, came in a weak 4th with $14 million in receipts. Guru is owned by Viacom. It's a modest disappointment but not a killer for Viacom shares which were down over 4% yesterday setting another 52 week low.

Box Office Strength Continues

The weekend box office was strong again, up 25% vs. a year ago. Another good weekend brings the summer, which begins the first weekend in May in Hollywood, into positive territory, up 2%. A poor April leaves the quarterly comp still down 3% but one more weekend of easy comps will probably allow the quarter to come in flat.

As I have written before, the summer is off to a better than expected start as many movies have found big audiences and there has been only one major disappointment (Speed Racer from Time Warner). Last year May was big thanks to the threequels of the Pirates, Shrek, and Spiderman franchises but those were the only films to do really big business in 2Q07. Analyst estimates for 2Q for the major theatre owners (Regal Entertainment and Cinemark Holdings) call for flat revenues. As a result I do not think that estimate risk for the stocks is material for soon to be reported 2Qs..

This could mean that the theatre stocks are close to bottoming, especially after last week's sharp drops due to the fallout from the guidance cut by in theatre advertising company National Cinemedia. NCMI fell close more than 20%. The other theatre owners are major shareholders in NCMI. For example, Regal lost about $130 million on its investment in NCMI which cost shareholders over 80 cents per share....

....I was IMing with my RealMoney.com buddy Doug Kass this morning about Regal Entertainment.. Doug is still short. Very good call lately as the stock is down from $21 where I sold during 1Q08. I told Doug that I thought the bottom was near given the very secure 7.2% current yield. However, the big problem this summer has always been 3Q. Last year 3Q was up 15% with ten films grossing at least $100 million, of which 3 were plus or minus $200 million and 2 were right around $300 million. It is always tough to predict box office performance but industry observers do not see this type of broad strength among the 3Q08 release. Hancock and The Dark Knight should be the most popular 3Q releases but the 6 to 8 movies that might be next in line just don't look like they will match the depth of the summer 2007. Risk to 3Q estimates remains significant given that current consensus for RGC is calling for flat revenues.

As a result, I think Doug can stick with his short for awhile longer and potential longs should stay on the sidelines. That said, 4Q08 faces easy comps and a strong release schedule so if the theater stocks make significant down moves from current levels and 3Q estimates get trimmed it will be time to cover shorts and get long for a trade.

Box Office Has A Sexy Rebound

A better than expected opening for Sex and the City, a decent second weekend for Indiana Jones, and still great legs from Iron Man powered the weekend box office up 28% from the same weekend last year. A year ago there were no meaningful new openings and the top three films were the third versions of the Pirates, Shrek, and Spiderman franchises.

Despite the great weekend, the summer box office is down 6% versus a year ago. This is a pretty good performance given the very tough May comps and might improve significantly in June as a year ago June saw few major successes until the last weekend of the month. A strong slate of films currently in theatres will be joined next week by the anticipated blockbuster from Dreamworks Animation, Kung Fu Panda, and the next Adam Sandler film, You Don't Mess With The Zohan. Other June films to keep an eye include The Happening from M. Night Shyamalan and The Incredible Hulk (both debut June 13th) and Get Smart and The Love Guru (coming on June 20th). Should these films find an audience, 2Q08 will come in better than current estimates for theatre stocks imply. This would not provide a meaningful trading opportunity in the group, however, as comparisons vs. a year ago become brutal again form the last weekend in June through Labor Day.

From the studio's perspective....

....Viacom's Paramount has to be pleased so far as they are distributing both Iron Man and Indiana Jones. These films will not be hugely profitable for Viacom because Paramount does not own the original content but it is good news nonetheless, particularly given recent guidance reduction on the cable networks side of the company.

Time Warner got some relief form its Speed Racer bomb via Sex and the City. The films should be nicely profitable after such a strong start but the sharp fall-off from Friday to Saturday makes it hard to predict what kind of legs the film will have. The positive headlines off the better than expected opening will support the entire Sex and the City franchise including syndication of the TV series and merchandise tie-ins.

Disney investors are probably worried about lagging performance for Prince Caspian, especially in North America. Disney splits the economics with Walden Media which should provide some cushion. Ratings and advertising trends at ABC and ESPN should be a greater focus for Disney investors.

News Corp's Fox studio does not have a big summer planned but it has a modest hit in What Happens In Vegas. A series of nicely profitable films like this one is what NWS investors are hoping to see this summer. As with Disney, it is ad trends at the cable and broadcast TV networks that should be of concern to NWS investors.

Finally, DWA shares have everything riding on the opening weekend on Kung Fu Panda. I think it will take an opening comfortably north of $50 million and ultimate North American box office of $250 million to support and provide further fuel for DWA shares following the strong run off better than expected 1Q results. I'll post later this week when I have a better feel for opening weekend expectations for the film. DWA is the stock to trade this week if you are looking for action in the entertainment names.

Box Office Turns Up. Finally.

After falling year-over-year, often substantially for eight of the past nine weeks, the weekend box office offered a respite. Led by better than expected openings for the top two films, The Forbidden Kingdom from Lionsgate and Forgetting Sarah Marshall from GE's Universal Pictures, the top 12 films grossed 12.4% more than the same weekend a week ago. Next weekend also looks like it should be a significantly favorable comparison but then the real tough comps start as Spiderman 3 opened the first weekend in May a year ago and was quickly followed by two other $300 million plus blockbusters in Pirates of the Caribbean 3 and Shrek 3. With the box office down over 20% this quarter even following this past weekend, estimates for theatre companies like Regal Entertainment and Cinemark Holdings look too high. Both stocks have held up fairly well over the past two months even as the box office has faded. I think this is a good opportunity to sell remaining long positions ahead of the tough summer comps (particularly in May, July, and August). Short positions could prove profitable although healthy dividend yields and free cash flow provide downside support.

The performance of The Forbidden Kingdom was particularly good news for Lionsgate. According to David Poland of Movie City News and The Hot Blog, the film is the third best opening for an LGF film that wasn't either a Saw or Tyler Perry film. I see both of those franchises as mature. Money makers for sure in future releases but not franchises which can drive growth in the company's theatrical and home video businesses. Broadening its distribution success to other genres is surely a positive for LGF something at least partially reflected in the nice bump in the stock over the past month.

I'll be back in a few weeks with a summer box office preview.

The Big Picture on Movie Studios

With all the writing I do on the movie business, sometimes I fear that I miss the big picture. Weekly box office or holiday DVD sales can be important factors in short-term trading of movie-related stocks but the long-term trends are less volatile and more important for a fundamentally based investor like me.

With that in mind, a recent report on the major film studios produced by Michael Nathanson of Bernstein Research caught my eye. The report concluded that the film business offers low single digit revenue growth over the next five years but could provide a somewhat greater level of operating income growth if (1) other studios follow Disney's lead and restructure their business models, and (2) new digital distribution channels emerge providing incremental revenue growth, much of which would come with higher margins.

Investors have generally valued film studio profits at a discount due to the unpredictability of the movie business. The discount has expanded recently as the home video market, the primary driver of studio revenue growth for the past three decades, rapidly matured. If revenue growth picks up slightly and operating margins expand, investors may narrow the discount in the coming years. This would be bullish for Disney, News Corp, Time Warner, Viacom, and Lionsgate....

....The major entertainment companies are giant conglomerates. Nevertheless, the film business is material to each. Based on Bernstein estimates and reported results, in 2007, film revenues represented 22% of News Corp, 20% of Disney, and 38% of Time Warner's non-cable revenue (TWX is almost certain to separate its Cable business, Time Warner Cable, later this year). Viacom's Entertainment segment, which is primarily Paramount, represented 41% of total corporate revenue last year.

The real value added from the Bernstein report was a summary of U.S. Consumer Spending on Movie Products from 1981 through 2007. In 2007, total spending was over $40 billion. Given higher international box office but a lesser developed home video and pay TV market it is probably fair to assume that worldwide spending on movie markets is more than twice the U.S. figure.

Over the past five years, growth in spending on movie products has decelerated sharply to just 2% per year. In the 1980s, growth was in the upper teens but slowed to the mid-single digits in the 1990s. Rapid growth in 1980s was due to the maturing of the movie rental business, the beginning of the home video purchasing boom, and the emergence of pay TV networks like HBO as buyers of studio output. DVD purchases took over as the growth engine in the 1990s with accelerating growth from 2000 to 2005 before the much discussed slowing in the DVD market took hold.

Today, DVDs are a no growth business, rentals are falling, the box office rises only by price increases, and pay TV channel purchases of films are flat. In other words, the revenue growth drivers for the major film studios offer little or no growth.

The future of film studio operating profits is not quite so bleak, however. First, there is some hope that revenue growth could pick up. Blu-ray's victory in the next generation DVD war might lead to a pickup in home video revenue from the combination of higher priced DVDs and some library replenishment. New distribution channels like video-on-demand, iTunes and other movie download services purchases, iTunes and other movie download rentals, and internet streaming all could emerge as incremental revenue drivers even as they replace current physical purchases and rentals.

Maybe more importantly, profit margins on digital distribution should be significantly higher given the lack of need for packaging and store distribution. Finally, the upgrade of movie theatres to digital and 3-D could provide a small boost to studios form higher movie ticket prices and distribution of non-movie content like concert films.

There is also some hope that margins could improve from management initiated restructuring of film studio business models. In recent years, Disney has produced the best EBITDA growth in films even though its revenue growth has been quite modest. The company's success has not been the result of simple cost cutting but rather a reworking of its business model for feature film production. The Pixar acquisition certainly played a factor but beyond that Disney is producing fewer films focusing primarily on family friendly films that play to the strength of its brand. News Corp has followed a similar path and also produced strong double digit operating income growth.

Other leading studios including Viacom's Paramount, Sony Pictures, MGM, GE/NBC's Universal Pictures, and Lionsgate have not produced results as good as Disney or News Corp. Looking ahead, given a continuation of slow top line trends and challenges presented by new distribution channels, these studios are likely to undertake similar business model restructuring.

No amount of restructuring can overcome the inherent volatility in film production. Disney has been fortunate to have the Pirates of the Caribbean franchise while Paramount's poor performance can be traced to a string of years with below historical market share and an inability to launch new franchises that produce sequels. Nevertheless, the outlook for improved operating income growth and return on investment for the studios and their corporate parents is real and that would be especially bullish for Time Warner and Viacom given their below average profitability.

For investors, the key takeaway is that the incremental perception of the movie business could improve and that is a bullish arrow in the quiver for Disney, News Corp, Viacom, Time Warner, and Lionsgate.

Weekend Box Office and Weather Channel Updates

The weekend box office fell by 33% against what is probably the toughest comparison it will face until May. The box office has now declined for 5 straight weekends but remains up almost 7% year to date. Comps may remain negative for a few more weeks but the rate of decline should moderate significantly. Analyst estimates for 1Q08 box office are in a range from a mid-single digit decline to a small gain. As a result, the slump should not cause estimates to fall and earnings misses. And to reiterate, a single month or even a whole year of bad comps does not mean that the box office is facing secular decline. Ticket sales are stable for the last ten years and we are coming off a two year run of higher box office including the all-time record year in 2007. I am glad I sold Regal Entertainment off its good 4Q and guidance increase but I won’t hesitate to buy it back if the current box office slump leads to another round of "the box office dying" stories. The next big film that could improve the outlook is Horton Hears A Who which debuts this coming weekend.

Separately, last week the Wall Street Journal and SNL Kagan provided an update on the sale of The Weather Channel and the Weather.com website. Apparently initial bids were due last week and might be coming in under the hoped for sale price of $5 billion. Among the bidders mentioned were NBC, CBS, Comcast, and Liberty Media. I'd guess that the Liberty Media interest is probably referencing a bid from Discovery Communications. There is logical reason for each of these bidders to be interested. NBC already operates a weather business that could quickly gain scale. CBS is looking to diversify and like other owners of major market TV stations, they are already providing weather services. Comcast is also looking to beef up its content both online and on TV. Comcast.net is a very heavily trafficked portal and weather is an obvious draw for a company that already reaches 24 million homes with TVs. Discovery is the leading content player focused on non-fiction content. I am not sure how this is going to play out but a $4-5 billion transaction is a big deal for the buyer and will set a standard for valuing cable networks at a time when the business is in the news due to the Scripps breakup, the Discovery recapitalization, and Viacom's attempted turnaround. Complicating the ability to draw conclusions about cable networks is the fact that Kagan and others believe that weather.com may be as valuable as The Weather Channel. Look for the winning bidder to see their stock price pressured.

Studios and Theatres Finalize Plans for Digital Upgrade

Reuters is reporting that theatre chains representing 40% of North American screens and the major movie studios have finally agreed to a financing plan to upgrade 14,000 movie screens to digital and 3-D capable technology. The upgrade will cost about $1.1 billion or $70,000 to $75,000 per screen. Studios, theatres, and other content providers would pay fees to use the newly installed equipment with the fees being passed through to bondholders that would be financing the transaction. Obviously, the current credit markets might make completing the deal difficult but the stability inherent in the theatre business should make this a low risk transaction. Digital and 3-D upgrades are a win-win for theatre and studio owners. Studios will save on storage and distribution by downloading films to theatres. Theatres will get better quality digital images, have the capability to receive non-movie content that might fill seats during slower times, and most importantly sell 3-D tickets at a premium. The success of the Hannah Montana 3-D film earlier this year at $15 per ticket has studios and theatres drooling. Dreamworks Animation is committed to issuing all of its movies starting next year in 3-D. Ultimately, the impact is going to be marginal in an absolute dollar sense but it will be enough to improve the operating growth profile of studios and theatres. I'll take incremental growth any place I can get in mature industries.

Final Wrap-Up of 2007 Box Office

The Motion Picture Association of America (MPAA) released its package of theatrical market statistics for 2007 last week. Most of the data I have already recounted in my many updates about the box office. However, there is some interesting data, especially as it relates to the major movie studios which are owned by Disney, News Corporation, Sony, Viacom, and Time Warner. The data referencing MPAA members only covers studios owned by these five companies but industry box office data includes all studios and all movie releases.

The MPAA data confirms previous reports that the 2007 domestic box office rose by 5.4% to $9.63 billion. This builds on the 2006 gain of 3.5% which broke a three year slump that saw 2003, 2004, and 2005 box office change by -1.2%, 0.5%, and -4.2%, respectively. Also, as I previously noted, ticket sales were up just 0.3% in 2007 so the domestic box office gain was driven by a 5% increase in ticket prices. The ticket price increase accelerated from 2002 thru 2006 when price increases ranged from 2.2% to 3.8%. In the three prior years, from 1999 thru 2001, ticket prices increased rapidly in the range of 4.9% to 8.3%.

Despite rising ticket prices, total admissions in 2006 and 2007 are almost exactly equal to 1997 and 1998. Admissions are down about 10% from the 2002 peak but ten years of unchanged ticket sales with the last two years up by about 2% cumulatively seriously challenges the myth that the box office is dying. This is a critical conclusion as far as analyzing the prospects for theatre and studio owner stocks.

Last year was also very good abroad as the international box office reached an all-time high of $17.1 billion, up 5%, representing 64% of the worldwide box office of $26.7 billion. International box office has doubled since 2001 with growth every year except 2005. Total worldwide box office has risen in five of the last six years and was 60% higher in 2007 than in 2001. Hollywood studios produce their films for a worldwide audience making the growth in international box office over the past decade another dagger in the myth that the movie business is dying.

Completing the 2007 recap, MPAA produced some other statistics confirming data I have previously supplied. The data shows that 2007's record box office was driven by blockbuster films. 2007 had 4 $300 million films vs. just 1 in 2006 and 28 films reached the $100 million blockbuster status vs. 19 in 2006. Growth in the domestic box office in 2007 was driven by the record breaking summer. MPAA notes that the top ten summer movies in 2007 grossed 23% more than the top ten in 2006. The next ten were up an astounding 39% but the third ten fell by 25%.

2007 was a blockbuster driven year which is why 2008 faces difficult comparisons which started last weekend and will extend pretty much continuously through summer. This was the main reason why I sold my multi-year long position in Regal Entertainment. I plan to stay on the sidelines until Regal makes a new 52 week low or we learn that this summer's slate will show better comps than currently expected.

MPAA confirmed one other point I have written about: in 2007, R-rated films did well generating 15% of the total domestic box office, up from 10% in 2005 and 2006. 15% is not an unprecedented level, as it was matched or exceeded in 2003 and 2004, but it does show that records are made when there is depth of interesting movies across all movie going demographics.

The most interesting new data in the MPAA report concerns the cost of making movies and the impact of new media on the movie business.

Download file

The graph on the left shows that for major releases by the five MPAA members the cost of producing and marketing a movie grew by 8% last year to $107 million. The major studios are also starting to dominate the independent business. Each major has started its own independent studio, which are competing with the independents traditionally associated with films festivals like Sundance. The graph on the right shows that the costs associated with these films has skyrocketed and is not too far behind the traditional big budget, widely released film. How the studios are coming to dominate the "independent" business is a topic for another column.

Facing rising production and marketing costs, the studios are increasingly turning to outside financing. Unfortunately, this MPAA data excludes the portion of costs that are paid by outside film financing ventures. David Poland, founder of Movie City News and author of the The Hot Button and , estimates that outside financing would push the actual cost up 30%. The idea behind outside financing is for the studio to slice revenue and costs on a film into lots of pieces to increase predictability on their own piece and give outside investors the ability to match their own risk tolerance to the appropriate investment vehicle (insert your joke about the credit crisis here!).

Box Office Recovery Continues

The box office continued its late year recovery with the three day weekend for the top 12 films rising 40% from a year ago. This strong performance builds the prior weekend’s gain of 37%. As recently as December 13th, the quarterly box office was running down 9.5% but two weekends of strong gains have reduced the deficit to 4.6%. With three films paying very well (National Treasure 2, I Am Legend, and Alvin and the Chipmunks) and another popular franchise to be released n Christmas Day (Alien vs. Predator), the box office should continue to expand vs. a year ago through the end of the year. By year end the quarterly decline may be around 2% and the year to date gain should be greater than 5%. The quarterly results will be at least as good as recently lowered estimates for the theatre stocks imply suggesting that the group could receive a January effect bounce starting any time. I remain long Regal Entertainment.

In other media news, News Corporation announced that it is selling 8 TV stations in mid-size markets for $1.1 billion. These stations have been for sale since mid year so no surprise here. However, I think the sale will remind investors that News Corporation is shifting its asset base toward a higher long-term growth profile. I remain long a small amount of News Corporation, looking to get much longer in the next few weeks as I free up cash from year end and early 2007 trades.

A Legendary Weekend At The Box Office

Proving once again that people will buy tickets when there is appealing in the theatres, the weekend box office rose 38% for the top twelve films according to BoxOfficeMojo.com. It's easy to point to home theatres or digital distribution but this past weekend and last summer showed that demand for the movie theatre experience remains robust if the studios release good product.

That was certainly the case this weekend when the top two films massively exceeded expectations. I Am Legend set December box office records with $76.5 million vs. estimates of $40 million. This marks the seventh straight #1 opening for Will Smith who by any measure is now the most bankable star in Hollywood. The #2 film was Alvin and the Chipmunks. The film grossed $45 million, fully three times most estimates.

Entering the weekend the quarterly box office was running down 9.5% but assuming the gain holds through the weekday play dates, the gap should fall to 6% or less. The gap should close further through year end as the almost certain blockbuster National Treasure 2 opens on Friday. That would mean that there are three films pulling in ticket buyers where just one film was popular a year ago.

Year to date the box office is up over 5% despite the poor fall and early winter. This follows a gain of over 4% in 2006, helping to isolate 2005's 6.1% fall in receipts as the exception. Prior to 2005, the box office was up every year since 1992. The same can't be said for ticket sales (those are flat over the past two years) but studio and theatre costs are measured in absolute revenue not number of tickets sold. I stand by my belief that the 2005 drop was a fluke and continues to color the movie business much more negatively than it deserves.

If the rest of the year performs as strongly as I expect, on Wall Street the theatre companies should be the prime beneficiaries. Regal Entertainment, Cinemark, and Carmike are all trading at or very close to 52 week lows. Regal and Cinemark have excellent current yields that provide support. I think the stocks can rally a buck or two from here before year end.

Weekend Box Office Turns Up

A strong opening for Disney's Enchanted, a surprisingly good opening for This Christmas, and decent showing for another 6 to 8 films led the box office to an up weekend following two straight negative weekend comparisons. The top 12 films pulled in 4.4% more than a year ago according to BoxOfficeMojo.com. The depth of films finding an audience is important given the poor box office performance so far this quarter with the total take down 10%. The next two weekends represent the easiest comparisons of the quarter so if the quarter is going to turn around the time is now. Besides the depth of films finding an audience this weekend, the release of The Golden Compass on December 7th should boost comparisons.

Enchanted is the first film opening on Thanksgiving weekend to win the holiday box office in five years. Hollywood has been opening anticipated Thanksgiving blockbusters on the weekend prior to the holiday over the past five years. Disney chose to buck the trend and used its brand and a well-reviewed film with appeal to a broad demographic to capture the to spot and bring in $50 million over the five day holiday weekend. Enchanted continues an amazing hot streak for Disney content whether it is films (Pirates of the Caribbean, Wild Hogs, Pixar films, The Game Plan) or Disney Channel Films and TV shows (Hannah Montana, High School Musical). Enchanted could prove particularly rewarding as it will transfer to theme parks, consumer products, Broadway, and sequels.

The other big story form the weekend is the performance of 3D and Digital screens showing Beowulf. FantasyMoguls.com is claiming that fully half of the $56 million gross for the film so far has been in non-traditional theaters. Theatre companies are currently upgrading many screens for 3D and several studios including Dreamworks Animation are planning 3D releases in the next few years. Theatres are able to charge a premium ticket price for 3D and analysts find the economics of upgrading screens attractive. In an industry lacking organic growth in ticket sales and facing secular challenges from digital downloads and home theatres, 3D is a potential positive. I am already seeing bullish comments on 3D from theatre company analysts and expect this to be a higher profile theme for the group in 2008.

Northlake remains long Disney, partially due to its content hot streak. Northlake also remains long Regal Entertainment, which currently yields a very safe 6.2%. The rally in the bond market makes this yield very attractive and could setup a trading opportunity if the box office recovers in the next two weeks.

Box Office Struggles Again

The winning streak at the weekend box office didn’t last long. After last weekend saw a string of six straight down weekends snapped, this weekend was back in negative territory. A disappointing opening for Fred Claus from Time Warner's Warner Brothers studios was the primary culprit in an 11% year-over-year decline for the top 12 movies. Most observers had pegged Fred Claus in the $28-30 million range while the current estimate for the weekend is $19 million. This lagging performance offset good holds for last weeks top two films, American Gangster and Bee Movie. Dan In Real Life also had a good hold, dropping just 25%; however, this film is heading toward a $40-45 million gross, great relative to expectations but not big enough to drive overall box office results.

Bee Movie fell 32% and took the top ranking with $26 million. American Gangster dropped 44% and came in second with $34 million. Investors may look favorably on Dreamworks Animation (DWA) since the film was not expected to win the top spot this weekend. Certainly, the performance is good news for DWA but the second weekend 32% decline is actually slightly larger than Over The Hedge, Tarzan, and Chicken Little, three films with similar opening weekend grosses. In addition, these three films ended with a total domestic gross ranging from $135 million to $171 million. Barring unusually good legs, Bee Movie will be lucky to reach the top end of this range. Most analysts had built in a domestic gross of up to $200 million in their models. A $20-30 million shortfall may not seem like much but when you multiply through lower grosses in the international, home video, and TV rights windows it could lead to a meaningful shortfall for DWA relative to estimates in 2008. Unit volumes of the Shrek 3 this quarter are more important to DWA's financial results and share price performance but the fact that Bee Movie looks like it will the end of expectations at best leaves little margin for error for DWA.

There are only a few other items of note in this weekend's box office....

.... First, the performance of Disney films The Game Plan and Dan In Real Life remains better than expected. Second, American Gangster is getting some Best Picture Oscar hype. It may get the nomination but the film it is often compared to, The Departed, fell just 29% its second weekend. And yes, box office does impact the Oscar race. Finally, speaking of Oscars, the latest Coen brothers film, No Country For Old Men had a huge opening on a very limited number of screens. The big number along with stellar reviews, 95% at Rotten Tomatoes, puts it high up in the race the coveted Best Picture nomination.

Despite the lagging box office this quarter, now running down about 9%, I am sticking with my long in Regal Entertainment. I am counting on the 5.8% current yield to support the shares and drive relative performance in a shaky market environment.

Box Office Finally Revives

Last weekend, the domestic box office broke a long slump with receipts rising for the first time in six weeks. American Gangster provided the oomph bringing in a better than expected $43.5 million. Bee Movie also helped with a gross of $38 million although the figure was below expectations of $40-45 million. These two films brought in 78% more than the top two films on the same weekend a year ago but lack of depth at the box office, indicative of weak performances for most films so far this fall, limited the overall weekend gain to just 3%.

Quarter to date the box office is down about 8% but summer strength leaves the year date gain north of 6%. This coming weekend could be a very large gain as last year saw just one new release that did not produce a big number. With the second weekend of American Gangster and Bee Movie and high expectations for family comedy Fred Clause, a significant dent in the negative quarterly comparison is in order. The pickup in weekend comps should generally continue through year end which ought to be enough to keep Regal Entertainment shares and their 5%+ current yield as a top pick in an uncertain market.

The other weekend box office news continues to be generated by Disney's Ratatouille which again won the overseas box office battle. Ratatouille brought in $15 million raising its international gross to $371 million and its total gross to $576 million. Both figures are significantly better than expected. Ratatouille has the lowest domestic gross of the last six Pixar films but it looks like it will pass The Incredibles to become the #2 Pixar film in international markets trailing only Finding Nemo. On a worldwide basis, Ratatouille will finish third among all Pixar films. This is all good news for Disney which should report a strong overall quarter after the close on Thursday.

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.

Third Quarter Box Office Is A Blockbuster

The final totals are in on the third quarter box office and as I have chronicled the results are spectacular. According to data I pull from BoxOfficeMojo.com, the box office rose 15% in the third quarter. My spreadsheet goes back to 2004 and that is by far the best comparison for any quarter.

The strength was driven by blockbusters. Five films released since May 4th have grossed between $290 million and $336 million. Four of those films are over $300 million, a level now reached by just 26 films ever. A total of 17 films released since May 4th have grossed over $100 million. By contrast, in 2006, there were just 11 films released in the summer season that grossed over $100 million.

The 3Q strength this year was similarly built on blockbuster releases. In 2006, just 3 of the 11 $100 million summer movies were released on after the last weekend of June. This year 10 films released in the same period grossed over $100 million including Transformers ($315 million, #3 this year, #20 all-time) and Harry Potter and the Goblet of Fire ($290 million, #5 this year, #30 all-time, and #2 of the five Potter films so far).

For theater companies, the news is all good....

....Expect strong third quarter earnings with the possibility of upside surprises even though estimates have risen. For example, Regal Entertainment has seen its third quarter estimate rise 21%, from 24 cents to 29 cents, since the company reported its 2Q results. As I will outline in column going up later this morning, I expect growth in the 4Q box office but momentum will recede sharply. 2008 now looks like a down year assuming a 52 week year (for RGC, 2008 will be a 53 week year, which still might be down). This loss of box office momentum will be the challenge for theatre stocks over the next few months but I am staying long Regal for now given the 5% current yield and excess cash on the balance sheet.

Depending on their release schedules, the third quarter was good for studios as well. The real story for the studios however is that overall domestic box office is up 8% year to date putting the year on track for its biggest gain since back to back 9%+ growth years in 2001 and 2002. Even better for the studios is the fact that international box office is tracking 20% ahead of 2006. This is another testament to the large number of successful blockbuster releases this year.

Paramount, owned by Viacom, is the #1 studio this year, with market share up 700 basis points vs. full year 2006. Other market share gainers include Warner Brothers, owned by Time Warner, up 300 basis points, and Universal, owned by General Electric, up 200 basis points. The biggest losers are 20th Century Fox, owned by News Corporation, and Sony, each down 500 basis points. Disney is also a loser, down 300 basis points.

Box Office Update

The weekend box office fell 2% for the top 12 grossing films. This breaks a string of 10 consecutive up weekends. The drop-off vs. last year is less than $1.7 million so it is possible, but doubtful, that when actual results as opposed to estimates are tallied the winning streak will continue.

The box office has also been up ten consecutive weeks, with the week ending July 12th being the last down comparison. Over the 70 days, the domestic box office total just over $2 billion, up 17% or $295 million, from 2006. At times I wonder about my own and others fascination with the box office totals but the bottom line is this is a big business. I follow lots of companies that don’t pull in $2 billion in revenue in a year!

The third quarter which began on June 29th for the theatre companies ends this coming Thursday. If the weekend comparison holds for the full week, the quarter will end up 15%. The year to date total through three quarters will be up 7.8%. As I have noted several times recently, analysts are seeing the big gains and estimates have risen steadily for Regal Entertainment and the other leading theatre chains. Regal shares have bounced back strongly and now sit just 4% below their all-time high, even after paying out $2.90 in dividends this year, including the going ex-dividend for 30 cents the week before last. With interest rates still well below levels of a few months ago, the shares still look attractive with easy box office comparisons continuing in the fourth quarter and a healthy current yield of 5.4%.

While the box office fell short this past weekend, there was good news for a couple of studios. Sony held the top spot with the third installment of the Resident Evil franchise. The film showed little deterioration from the first two installments. Lionsgate shareholders should also be happy as Good Luck Chuck opened to a slightly better than expected $14 million. Lionsgate has had a series of disappointments at the box office so far this year so the shares may respond to some good news.

Summer Box Office Shows Finishing Kick

The summer box office ended with a bang with the best ever Labor Day weekend. Led by the latest edition of Halloween series, the box office for the top 12 films rose 21.6% over last year's holiday weekend. Based on data from BoxOfficeMojo.com, ticket sales for the weekend should be the highest since at least 1982. Halloween provided most of the gas this weekend, smashing the all-time Labor Day weekend record with a better than expected $31 million for the four days. The prior record holder was Transporter 2, which pulled in $20 million in 2005.

I'll have a full recap of the summer box office on Thursday. For now, it looks like the 2007 will be the best ever summer by as much as 8%, coming in $300 million ahead of the prior record in 2004. Using BoxOfficeMojo data for ticket prices, it appears that ticket sales in summer 2007 exceeded 2004 by 2% and may have approached the 2002 ticket sale record.

Quarter-to-date the box office remains up 17%. Analysts are beginning to ratchet up estimates with Regal Entertainment seeing at least two boosts in the last ten days. The shares have responded, rising 5.3% in August and sitting just 2.6% below the all-time high, reached in May and early June as anticipation of a strong summer box office initially peaked....

....Comparisons remain easy for the rest of September in what is usually the second of third slowest month of the year. I expect the 17% quarterly gain to moderate slightly but the news should remain favorable. As investors look at a year-to-date gain of almost 8% and realize this is the second consecutive year of solid growth, sentiment toward theater stocks should continue to improve. I am still looking to sell RGC as it moves to new highs because 2008 comparisons will be very difficult although the shares are likely to remain a solid relative performer given the 5.3% current yield.

Summer Box Office Record Falls

The weekend box saw another gain, rising 4.9% vs. a year ago, the 7th straight up weekend. Quarter to date the box office is now up 16.5% and the year-to-date gain is 7.7%. Gains should continue to moderate now that kids are back in school and studios are no longer releasing potential blockbusters. September is typically the second or third slowest month of the year and studios either dump films thought to be lacking a potential audience or offer fare that is pointed the Oscars and major awards.

Sometime last week, the summer box office surpassed the all-time record of 2004. Manu media outlets are reporting that summer receipts now exceed $4 billion for the first time ever. My own spreadsheet shows the tally at $3.96 billion, up 3% over the 2004 record with the measuring period ending on Labor Day. I started my calculation with the opening of Spiderman 3 on the first weekend in May while others went back to May 1st.

Gross receipts matter because costs inflate with ticket prices. Nevertheless, on the basis of tickets sold, according to Media By Numbers as quoted in the Wall Street Journal, the summer of 2007 only ranks in terms of ticket sales likely to end up around 606 million. The all-time record summer for ticket sales was 2002 with 653 million. The top grossing movies in the summer of 2002 were the original Spiderman, Star Wars: Episode 2 – Attack of the Clones, Signs, Austin Powers in Goldmember, and Men In Black II. According to BoxOfficeMojo.com, the original Spiderman sold 69 million tickets, while Spiderman 3, the top grossing film this summer sold 51 million tickets.

I still like Regal Entertainment as a long trade off the record breaking summer box office....

....Catalysts are lacking now that the big gains every weekend will disappear but the current yield is attractive given the market environment and the fact that estimates for 3Q are rising. RGC can easily pay the dividend and has a leverage cushion on the balance sheet most likely dedicated to future acquisitions. The company has a history of paying special one-time dividends, including a $2 dividend earlier this year with its share of the proceeds from the National Cinemedia IPO. The capacity for a small special dividend exists but it is not something I am counting on.

My thought here on RGC is as a trade. I have owned the stock on behalf of Northlake clients for almost 18 months and would most likely exit if the stock moved to new highs over $23, which is where I believe it would be fairly valued.

Box Office Remains Strong

The box office continues to roar with the top 12 movies up 23% this past weekend. Last week marked the fifth straight up week and the weekend was up for the sixth consecutive time. Gains should moderate from this point forward as all the major releases are now in theatres. However,, gains should continue thanks to expected good legs from a few films.

Superbad, from the same creative team behind The 40 Year Old Virgin and Knocked Up, led the weekend box office with a much better than expected opening weekend of $31 million. Coming in second was Rush Hour 3, which fell an acceptable 55% in its second weekend. In third place showing good legs was The Bourne Ultimatum which fell just 42% in its third weekend. By comparison, The Simpsons Movie fell 55% in its third weekend. In fact, Bourne has grossed just $1.5 million less than Simpsons in one less week. The point is not to denigrate SImpsons but to show that Bourne is showing good legs that will help overall box office comparisons for the next several weeks.

The big story though is likely to be Superbad. Both Virgin and Knocked Up showed very good legs. The success of those films may have set the stage for a more front loaded run for Superbad but with a little competition on the horizon, I expect the film to perform well at least through Labor Day.

Quarter to date the box office is now up 16.6%. The back end loaded summer which I had stressed in many comments over the past two months has come to fruition and the 2004 summer box office record will fall this weekend. With a few more weeks, albeit historically slow ones for movies going, it looks like the old summer record will be exceeded by at least 4%.

This should be good news for theatres stocks like Regal Entertainment (RGC), Cinemark Holdings, and National Cinemedia (NCMI)....

All three found their footing last week. RGC was firm even earlier in the week thanks to the box office and the 5.5% current yield. CNK reported good earnings and initiated a dividend giving the stock a 4% current yield. I still think the shares can work higher in the near-term as estimates seem certain to rise (in fact, as I a type this comment, I received an alert that Wedbush raised its RGC estimates for 3Q to above consensus).

I still expect to use the next push higher in the shares to reduce positions as comparisons will be stiff in 2008 and the end of the summer of the box office season will reduce favorable news flow. But for now, given recent market volatility in both directions, I feel very comfortable with the ability to play offense and defense with theatre stocks.

International Box Office Strength

One of the things I have not stressed enough in my comments on the box office has been the strength of the international box office. According to Variety.com's international weekend wrap-up, the non-US box office is up 20% year-to-day with summer gains exceeding those of the US. Unlike my domestic box office commentary which focuses on the impact on US theatre exhibitors like Regal Entertainment (RGC) and Cinemark Holdings (CNK), for investors, the international box office is important for the studios that produce and market the films. The top studios are owned by News Corporation, Disney, Viacom, Sony, General Electric, and Time Warner.

The reason the international box office matters is because of the well known escalation in the cost of producing and marketing films. Most major releases cost at least $100 million to produce and market and it is not unusual for these costs to balloon to $250-300 million or more. This data is not readily available and what data exists probably understates the true costs.

Strength in international box office accrues to the benefit of the studios by helping to cover the production and marketing costs with box office receipts (the holy grail of Hollywood!) and providing revenue from sale of DVDs, sales and licensing of merchandise, and the sale of international broadcast and pay TV rights.

According to data at BoxOfficeMojo.com, the international box office has risen from $4.4 billion in 2000 to $9.6 billion in 2006, a CAGR of 14%. During this same time frame, the domestic box office has risen from $7.7 billion to $9.2 billion, a CAGR of just 3%. Looked at another way, international box office was 36% of the total global box office in 2000 but had risen to 51% in 2000.

The growth in the international box office has come from a variety of factors. Economic growth abroad and rising living standards has led to greater consumption of movies in many countries. Distributors have responded by investing in new theatres around the globe including the multiplexes with stadium seating common to the US. Greater marketing emphasis has been placed abroad to tap new markets and films have been produced with international audiences in mind (witness the use of Asian, African, and European pirates in this year's release of Pirates of the Caribbean: At World's End. Local productions have also helped with thriving movie studios existing not just in mature markets like Germany but in emerging markets like Romania....

As with the US market, quality product that interests moviegoers is necessary to drive year-over-year gains. This will become more important abroad as more markets mature. Nevertheless, just as the hype that domestic box office is dead has been put to rest by back-to-back years of strong growth and the soon-to-be all-time record summer of 2007, the idea that the movie studios are in a hopeless situation against rising production and marketing costs and weak domestic growth is a myth that that does not hold up to scrutiny.

Unfortunately for investors, the major studios are small parts of large corporations so growth in the global box office is not something for which direct investments are available. That said, the studios can drive year-to-year results at individual studios which do materially impact earnings and cash flows at individual companies. The success of Disney over the past few years with the Pirates of the Caribbean series, the first picture in the The Chronicles of Narnia franchise, and the Pixar films has been partially responsible for the multiyear double digit operating income growth the whole company has enjoyed. News Corporation's 20th Century Fox studio has alos enjoyed a great multi-year run. On the flip side, a string of poorly received films from Viacom's Paramount studio and Time Warner's Warner Brothers and New Line studios has severely penalized earnings at their parents.

But now Paramount and Warner Brothers are back, ranking #1 and #2 in year-to-date domestic box office. At the a same time, growth is stalling at the Disney and News Corporation where even many successful films in 2007 and 2008 won’t be enough to drive significant growth in their studio segments in this year and next.

Despite the tough comps faced by Disney and News Corporation studios, I still favor these two stocks among the large cap diversified entertainment companies due to continuing to ability to produce double digit operating income growth from other divisions and the most advanced digital and online strategies. That said, decelerating momentum is a tough sell to investors and laggards like Time Warner and Viacom may enjoy accelerating growth thanks in part to their movie studios and the growth of the international box office. That is worth keeping an eye on when evaluating how to allocate your money among the major media stocks.

Summer Box Office Sizzle Continues

Investors continue to flock to the nation's theatres to escape the heat and take their mind off the stock market. The weekend box office rose 29.8% according to BoxOfficeMojo.com based on the gross of the top 12 films. This marks the fifth straight and sixth of the last seven weekends with significant year-over gains. Quarter to date the box office is very healthy with receipts up 17%, while the year-to-date gain has now risen to 7%.

Similar gains should hold through next weekend as there is one remaining picture expected to open strongly, Superbad from the team behind the 40 Year Old Virgin and this summer's surprise hit Knocked Up. In addition, The Bourne Ultimatum is showing good legs and although it opened below expectations at $50 million, Rush Hour 3 will have one more another sizable weekend even with a sharp 60% decline. After next weekend, the year-over year gains should moderate but the summer record is sure to fall and analyst estimates for 3Q admissions revenue at the major theatre chains are sure to be too low.

Regal Entertainment shares have bounced back over 3% from the heavy selling that occurred on Thursday. I still think the shares can bounce further and the 5.5% current yield makes the shares a good defensive investment if the market again suffers heavy losses.

Box Office Strength Continues

It seems as though everyone is going to the movies to take their minds off the lousy stock market. The weekend box office rose 36% as The Bourne Ultimatum earned $70.1 million, the biggest ever opening for a movie in August and the 28th best opening weekend ever. Bourne also had a bigger opening than any James Bond film. This was the fourth straight weekend the box office has been up and follows on the heels of last weekend when the year over year gain was 48%.

Quarter to date, the box office is now up 17% pulling the year to date gain to 7%. August should continue to produce stellar gains as there are still two movies to be released with high expectations: Rush Hour 3 this coming weekend and Superbad the following weekend. The Bourne Ultimatum should also keep pulling in big bucks as it received stellar reviews and plays well to an older crowd, two things which normally provide good legs.

It seems pretty clear now that the "box office is dead" theory was noting more than a myth. July 2007 was the biggest single month ever, pulling in over $1.3 billion and besting the previous best month by more than 12%. I read somewhere that July also ha the most ticket sales for any month since the 1950s but I can’t verify that fact. This summer will easily break the all-time summer record of $3.8 billion set in 2004 with the final total likely over $4 billion. The year to date gain of 7% comes on top of last year's gain of 4.2%and 2007 should market the second consecutive year of higher ticket sales after three straight declines....

All of this is good news for theatre companies including major exhibitors like Regal Entertainment (RGC) . RGC shares carry a current yield of over 5% and 3Q estimates look like they could be way too low. The leading theatre advertising company, National Cinemedia (NCMI) reports on Thursday. I expect their 2Q be less impacted by the weaker than expected 2Q box office as theatre advertising budgets are growing rapidly and should be less impacted by monthly fluctuations in box office. NCMI's report might lead investors to focus on the current box office strength to the benefit of RGC.

The Simpsons Drive Huge Gain at the Box Office

A bull market existed at one place over the weekend: the nation's movie theatres. Thanks to a huge opening for The Simpsons Movie and good holds for all the other top movies, the weekend box office rose 45% vs. the same weekend a year ago. Since June 29th, when the second quarter started for the theatre companies, the box office is up 14.8%. This figure is well above upper single digit gains built into analyst models.

Th box office comparison should remain favorable but with a more modest gain this weekend with the opening of The Bourne Ultimatum and solid performances from holdovers. In 2006, this coming weekend was the last decent weekend for the summer when Talladega Nights opened to $47 million. The rest of this summer faces easy comparisons with a couple of more films to be released that are expected to do solid business.

The box office is on track to comfortably exceed the all-time summer record set in 2004. According to data compiled from BoxOfficeMojo.com by David Poland of TheHotBlog.com, the box office is presently running $220 million, or 6-7% ahead of 2004. Year-to-date, the box office is now up 5.9%, the second consecutive year of strong growth following last year's gain of 4%. This year is also on track for the second consecutive gain in tickets sold following a three year slump. This data should put to bed the "going to the movies is dying" theme.

Movie-going is not a great growth a business but it is a stable business that produces significant free cash flow for the theatre companies. Regal Entertainment (RGC), widely owned by Northlake clients, represents a great way to play the summer box office momentum and the overly negative sentiment on the industry. Regal is also attractive in the currently unstable stock market environment as it has a 5.6% current yield. Regal was up 10 cents on Friday and fell just 7 cents, less than one-third of one percent, combined on Thursday and Friday.

Summer Box Office Update #2

As I expected, the summer box office momentum resumed at the end of June. Since June 29th, the box office is up 11%, ahead of analyst estimates built into 3Q models for the theatres companies. I think the rest of July and August should be able to sustain the gains with some possibility for further gains as the release schedule looks good and early reviews and buzz on upcoming films is favorable.

The renewed momentum should allow theatre stocks to move back to their early summer highs over the next six weeks. Regal Entertainment (RGC), held widely across the Northlake client base should be a primary beneficiary

Coming into the summer, analysts were looking for an upper single digit gain for the season which runs from the first weekend in May through Labor Day. Box office gurus also were expecting the summer to beat the all-time record from 2004 of $3.8 billion. Most of the excitement surrounded the big three May blockbusters, Spiderman 3, Shrek The Third, and Pirates of the Caribbean: At World's End. While none of these films missed analyst estimates, the strength mostly occurred overseas. The combined domestic gross of the films is almost $960 million but I think many prognosticators felt that $1.1 billion was realistic. Two other early June releases also fell short of expectations. Evan Almighty will miss by about $70 million and Oceans 13 will miss by about 45 million

The shortfall of $265 million for these five films soured sentiment on the theatre stocks and cost the box office about 7% versus the record summer of 2004. As a box office and theatre stock bull, I was disappointed but I didn’t get too shook up because I was aware that this was going to be a backend loaded summer.

I had completed an analysis which revealed that last summer there were only two films released in July or August that grossed over $100 million -- Pirates of the Caribbean: Dead Man's Chest reached $423 million and Talladega Nights brought in $148 million. However, for 2007, the gurus expected as many as nine films released from the last weekend in June onward to gross over $100 million and two of those films, Transformers and Harry Potter and the Order of the Phoenix, had the potential to bring in $200 million to $300 million. Fortunately for box office bulls, the recent releases have done very well and as I mentioned buzz is good for the yet to be released films....

Here is a table from which shows how the post-May summer films have performed relative to initial expectations:

Download file

As you can see, the June, July, and August films are shaping up well. This is critically important to the box office thesis given the shortfall from the May and early June films.

When I built that table for the first time, I noted that the June through August blockbusters had the potential to pull in 32% more than the 2006 blockbusters from the same period. At the time, I excluded The Simpsons Movie from the 2007 tally because initial expectations had the film grossing under $100 million. The film is getting favorable reviews and Fox has done a good marketing campaign and expectations have grown considerably. In fact, some gurus believe the film could do over $40 million this coming weekend when it opens. Adding The Simpsons Movie to the 2007 list raises the growth rate for blockbusters this year to 46% with almost all of the gain coming from June 29th and beyond releases.

Obviously, the box office is not growing by 40% as there are other films in theatres besides blockbusters and many of them are getting crowded out by weekend after weekend of major openings. The summer of 2007 is the year of the blockbuster while the summer of 2006 benefited from depth of films.

The bottom line is that despite a slow start, the summer of 2007 is on track to set the all-time seasonal record and the momentum since June 29th could actually improve the next of couple weekends. This should be enough to provide the final upward surge I have been expecting in RGC.

The one remaining obstacle is the second quarter earnings report that contains estimates built on upper single digit rather than 2% gains in the second quarter box office. I think the current box office momentum will trump the probable 2Q miss. In addition, the fact that has pulled back more than 7% from early summer highs means that the 2Q miss might be in the stock.

We'll know more soon as the company reports before the open tomorrow morning.

Summer Box Office Growth Still On Track

The third quarter improvement in the summer box office continued over the weekend but at a slower pace. Led by the new Adam Sandler film, I Now Pronounce You Chuck and Larry, the box office for the top 12 films was up 3.5% according to data from BoxOfficeMojo.com. Harry Potter and the Order of the Phoenix came in second followed by the opening weekend for Hairspray. I had hoped for a few million more from the Potter film and Hairspray and a gain in the range of 6-8%. However, things are still shaping up well for this quarter with next weekend looking particularly good when The Simpsons Movie is expected to open to a big number. Some observers are looking for a monster opening in the $40-50 million range for The Simpsons Movie, while last year the #1 movie on the same weekend was Miami Vice which brought in just $25.7 million.

Since June 29th, which will be the start of the third quarter for the theatre exhibitors, the box office is up 11%. Theatre exhibitors begin to report earnings this week with my favorite, Regal Entertainment (RGC), announcing before the open on Thursday. I believe the strength so far this quarter will offset the fact that earnings will almost certainly fall short of estimates in 2Q due to the fact that the box office gained just 2.5% against analyst models that were built an upper single digit gain. Furthermore, the recent rally in interest rates, with the 10-year falling below 5%, makes RGC's current yield of 5.5% a lot more attractive and leaves the shares with good downside protection.

Summer Box Office Back On Track

After a weaker than expected June, the summer box office is now on track for an all-time record. With Harry Potter and the Order of the Phoenix opening at the high end of expectations and transformers showing great legs, the weekend box office for the top 12 films was up 14% according to BoxOfficeMojo.com. Since June 29th when Ratatouille opened, the box office is up 12% and the comparisons look favorable for the next four weeks.

For example, this coming weekend will see the opening of Hairspray and I Now Pronounce You Chuck and Larry, two films with the potential to exceed $100 million in domestic box office. Both films could open to $30 million next weekend while Potter earns around $35 million, Transformers pulls in more than $15 million, and Ratatouille earns $10 million. That works out to $120 million for the top five films against $99 million for the same weekend last year. The following weekend brings the highly anticipated The Simpsons Movie with The Bourne Ultimatum and Rush Hour 3 opening on each of the next two weekends.

This is good news for my bullish summer box office thesis and could lead to a nice bounce in the theatre stocks which have pulled back lately while the market has reached new highs. I think the pullback has been driven by the weaker than expected June and the realization that the June quarter estimates for the theatre stocks are too high. Current and projected box office strength should cause investors to look ahead providing a good trading opportunity in Regal Entertainment (RGC). I still think the shares can rise $23-24 this summer which would be a good opportunity to exit the position at a substantial profit and total return.

Summer Box Office Update

The big three summer movies have now each been in theatres for more than two weeks. Together they are on track to gross about $900 million domestically, a huge number by any means (only 23 movies have ever grossed $300 million), but one that is a modest disappointment to many observers including myself.

Spiderman 3 looks like it is headed to $330 million with Shrek The Third heading towards the low $300 million range and Pirates of the Caribbean: At World's End probably finishing between the other two. I think Spiderman and Shrek will wind up about $40 million below where many expected and Pirates may finish $60 million short. These shortfalls are irrelevant to the financial performance of the studios involved (Sony (SNE), Dreamworks Animation (DWA), and Disney (DIS) but they do dampen enthusiasm toward the box office slightly. I think optimism will pick up over the next 8 weeks as comparisons remain pretty favorable.

In an interesting twist, foreign box office for Spiderman and Pirates is running well ahead of the previous films in those franchises even as domestic performance is running 15-20% behind (Shrek will be released in international markets this weekend). In fact, Spiderman 3 will likely end up the highest grossing of the three films on a global basis. This bodes well for ancillary revenue streams from these films and is reminder that international theatrical exhibition is a growth industry for U.S. studios...

Returning to the domestic front, from June 1 onward last year, the summer saw six films released that grossed in excess of $100 million. The Break-Up, Cars, Click, Superman Returns, The Devil Wears Prada, Pirates of the Caribbean: Dead Man's Chest, and Talladega Nights totaled $1.4 billion with Pirates alone bringing in over $400 million. This summer industry observers see as many as one dozen movies still to be released that could reach box office of $100 million including seemingly sure things like Ratatouille from Pixar, the next Harry Potter film, The Bourne Ultimatum, and Rush Hour 3. Fantastic Four, Oceans 13, Transformers, and the just released Knocked Up are also seen as members of the $100 million club.

Predicting movie grosses is always difficult and the rapid fall-off of the initial big three is being chalked up to competition among major blockbusters but I'd be willing to bet that comparisons remain quite favorable for the rest of the summer, particularly after mid-July when the biggest weeks of Pirates 2 are lapped. This is good news for theatre stocks like Regal Entertainment (RGC), Carmike Cinemas (CKEC), and Cinemark Holdings (CNK). Theatre advertising leader National Cinemedia (NCMI) should also benefit. And, of course, the big movie studios including DIS, News Corporation (NWS), Time Warner (TWX), and Viacom (VIA) will be collecting the bulk of the box office receipts. Add those dollars to a bountiful summer abroad and the movie business is in the sweet spot for the next few months. Finally, don’t forget that getting fannies in the seats requires advertising. Movie studios are showing caution in the upfront advertising market due to worries about delayed viewing via DVRs but for right now, TV networks and stations, radio companies, internet portals, and newspapers are likely to get a boost as the studios try to make sure ticket buyers remember which blockbuster is opening which weekend.

Pirates Sets Sail Under Moderate Winds

Pirates of the Caribbean: At World's End performed in line with expectations pulling in $156 million over the Memorial Day weekend to set a new record for the holiday period. However, whisper numbers were higher as many observers, including myself, thought the film could bring in $175-200 million. Most Wall Street analysts were looking for the lower figure so estimates at Disney (DIS) should not be impacted but depending on the second weekend gross, some potential upside in DIS's numbers I was hoping for may be not come about.

Despite the somewhat lower than expected numbers for Pirates and a good but not great second weekend for Shrek, the box office set a Memorial Day weekend record with receipts up 8% vs. last year for the top 12 films. The box office remains on pace for a record setting year with total gross admissions up 7.1% though Monday. Receipts are also running over 4% ahead of 2004, the all-time record year. These figures and a favorable release schedule through June leaves the short-term bull case for the theatre stocks intact. I remain long Regal Entertainment (RGC) and still anticipate the shares can move to $23-24 by the end of June....

Returning to Pirates 3, it is worth noting that the film is running almost dollar for dollar on a daily basis with Pirates 2 which went on to gross $423 million domestically and become just the third film to reach $1 billion globally. Foreign gross for Pirates 3 is off to a huge start with $244 million already compared to $642 million for Pirates 2 and $348 million for the original. Pirates 3 is benefiting from a simultaneous worldwide rollout.

We won’t really know until next weekend's numbers are in how Pirates 3 will stack up against the Pirates 2. Pirates 2 fell 54% in its second weekend but the comparison could be complicated by the fact that it was released in July and its weekday grosses were boosted by the summer holiday. Box office analysts will likely focus on the 54% decline to gauge Pirates 3, especially since the record breaking openings for Spiderman 3 and Shrek 3 have been followed by sharper declines in the second weekends than for the earlier films in those franchises. Pirates 3 will also have to deal with the arrival of two new wide releases aimed at the young adult and adult audience including Knocked Up from the creators of The 40 Year Old Virgin. The film has very good early buzz.

If I had to guess, Pirates 3 will fall short of Pirates 2 which isn’t all that unusual for the third film in a franchise. I suspect Pirates 3 will still get to over $350 million and be the #1 film for the summer. Spiderman 3 is tracking toward $330 million domestically, behind the first two Spiderman films, but will be highest grossing film in the franchise on a global basis due to outstanding global performance. Shrek 3 is headed toward $300 million. This may be considered low making last Monday's spike above $30 the last time Dreamworks Animation (DWA) shares will see the thirties until the fall when The Bee Movie opens on November 2nd.

Shrek The Third Off To A Good Start

Shrek The Third beat expectations this weekend as I thought it would. The total box office of $122 million is the third highest opening weekend of all time behind only Spiderman 3 and Pirates 2. It will fall to fourth next weekend when Pirates 3 likely surpasses Spiderman 3. The weekend box office was up more than 9%and the summer season is off to a great start. Year-to-date the box office is now up 7%. The quarter is also shaping well and comparisons remain favorable next weekend and through June. Regal Entertainment (RGC) closed at an all-time high on Friday and still has some room to run.

Shrek The Third Hits Theatres

The second big movie of the summer season, Shrek The Third, hits theatres today (actually showings began at 10 PM on Thursday night but those will count as opening day and opening weekend totals). No other new films are in wide release this weekend and Spiderman 3 is fading fast – even though it is still headed well over $300 million it will fall well short of the first two installments.

Expectations for Shrek 3 are for an opening around $110 million, well behind the new record set by Spiderman 3 of $151 million set just two weeks ago. My sense is that there is some worry that Shrek 3 may get squeezed between Spiderman 3 and Pirates 3 which opens next weekend and is apparently tracking extremely well.

All three Shrek movies opened on the same weekend. The original opened in 2001 and pulled in $42 million its first weekend on its way to $267 million domestically. On the second Memorial Day weekend, the three day gross matched the opening weekend. The film showed great legs, finishing with six times its opening weekend gross.

Shrek 2 opened on a Wednesday in 2004 and pulled in $21 million the first two days before picking up $108 million on its first weekend. The second Memorial Day weekend saw the gross fall to $72 million on its way to domestic box office of $441 million, good for second all-time if you disregard the gross form the 1997 re-release of Star Wars. Shrek 2 also showed good legs, especially as the era of frontloaded box office receipts was firmly in place by its 2004 release.

Shrek 3 should benefit from the broadening of the audience base as evidenced by the much larger gross of the second film compared to the first. However, early reviews have been mixed to poor which could hurt. The first two films were very well reviewed. Then again, Spiderman 3 met with mixed reviews before blowing away the opening weekend record and beating high expectations.

I think that Shrek 3 may surprise to the upside because expectations have been held in check by its placement between Spiderman 3 and Pirates 3.....

The comparison to a year ago is vs. The DaVinci Code and Over The Hedge which were new releases and brought in a combined $115 million. If Shrek 3 brings in around that much, the comparison should be a good one as Spiderman 3 should bring in another $25 million as much the next films combined a year ago. The box office enters this weekend 5.4% ahead of a year ago and up 6% quarter to date.

Shrek 3 is distributed by the Paramount division of Viacom (VIA) but is still a Dreamworks Animation (DWA) release. Pirates 3 is wholly owned and distributed by Disney (DIS).

Adjusted for the $2 special dividend paid in April, Regal Entertainment (RGC) shares closed at an all-time on Wednesday, up 17% since it went ex-dividend on March 26th. I remain long and think continuing strong box office comparison can push the stock up another 5% or so in the next month as which point I will likely take my sizable total return and go home.

Spiderman 3 Spins A Massive Web

Spiderman 3 blew away the all-time opening weekend box office brining in $148 million in domestic box office. The old record was set last year by Pirates of the Caribbean: Dead Man's Chest which grossed $135.6 million. Look for Pirates of the Caribbean: At World's End to be the new record holder when it opens this coming Memorial Day record. And that little film Shrek The Third due a week from Friday seems on target to open north of $100 million. So much for the death of the theatre business.

Spiderman has also opened in many overseas markets where it similar opening day and opening weekend records. The film has already grossed $375 million globally placing it in 96Th place on the all-time list. Spiderman is ahead of Batman Returns and Beauty and the Beast and just short of last winter's blockbuster, Happy feet, which grossed $384 million globally for its entire run.

We won’t know how high Spiderman 3 is headed until we see mid-week and second weekend box office but with little competition next weekend, the numbers will likely remain huge. A 60% decline would still leave Spiderman 3 with $60 million on its second weekend, which would be good enough for 35th place on the all-time opening weekend list. The biggest ever second weekend belongs to Shrek 2 at $72 million just ahead of $71 million for the original Spiderman. Pirates 2 is 3rd with $62 million on its second weekend a year ago.

My own estimate for Spiderman was $130 million, low but good enough to allow me to reward myself with the closest guess in last week's contest.

Here are a few other interesting facts on the weekend box office. Spiderman 3’s gross of $148 million exceeded the entire comparable weekend from a year ago where all the films in release brought in just $110 million with Mission:Impossible 3 leading the way in its opening weekend at $48 million. The total box office tally for this weekend is $181 million with the $71 million gain moving the quarterly box office from a 5.3% decline to a 3.5% gain. The gain should build considerably this coming weekend when the comparable period a year ago saw just $99 million in box office as the summer’s biggest flop, Poseidon, opened in second place to just $22 million, $5 million behind MI3: Spiderman 3 is likely to beat to beat the combined gross of those two films by at least $10 million next weekend and its weekday grosses will blow away MI3’s from a year ago. There are two new films in wide release this coming weekend that could find moderate interest including 28 Weeks Later, the sequel to the cult hit 28 Days Later, and Georgia Rule, a chick flick with a strong cast that might be good counter programming to the second weekend of Spiderman 3.....

Despite excellent performance so far this year, I think the massive box office momentum in place through the rest of May and June will power shares of Regal Entertainment up another couple of bucks over the next 6 weeks to my $23-24 target. I still expect to be a seller at that level as comparisons toughen in July against last year's release of Pirates 2. Later in the summer comps ease again however against what looks like a strong lineup this year including the third film in The Bourne Ultimatum and Rush Hour franchises. At $23-24, RGC would be trading at 9 times 2007 EBITDA adjusted for its ownership in National Cinemedia (NCMI). I think that it is a full valuation relative to other media stocks, most of which trade at 8-10 times 2007 EBITDA estimates.

Weekend Box Office: Spiderman is Coming

The weekend box office was extremely week, declining 27% against the same weekend a year ago. The total haul of $75 million was the lowest since last the weekend after Labor Day last September. According to BoxOfficeMojo.com, it was the lowest final weekend of April since 2000.

Back-to-back poor weekends leave the box office down 5% so far this quarter and have pulled the year-to-date comparison to up just 3% vs. a year ago. Is it time to be worried about the box office is dead theme re-emerging? NO. Spiderman 3, Shrek The Third, and Pirates of the Caribbean: At World's End are about to come riding to the rescue, kicking off what should be a record-breaking summer (yeah, summer box office starts the first weekend in May).

Next weekend along could bring the quarter back to even and by the time Shrek hits theatres the following the weekend the quarterly and yearly growth comparisons will be looking real good again. Last summer got off to a lousy start with Mission: Impossible 3 and Poseidon opening to $47 million and $22 million, respectively. I guarantee you that Spiderman 3 will comfortably beat the combined openings of those two films on the first two weekends last May. Shrek will do the same. And Pirates will beat the at the time record Memorial Day opening weekend of X-Men by at least 15%.

If you are looking for a little for some guidance an how Spiderman might open, BoxOfficeMojo.com is a great site. Here is a link to the top 125 all-time opening weekends. I am calling Spiderman 3 at $130 million and the combined opening 3-day weekends at $378 million.

Some Data Challenging the "Box Office is Dead" Hype

Not to beat a dead horse but I wanted to follow-up on my post yesterday where I stated yet again that the hype that the domestic box office is dead or dying is off base.

Here is a link to the annual domestic box office performance since 1980 courtesy of BoxOfficeMojo.com. Several things jump out when you look at the data. First, a slowdown in growth beginning in 2003 is evident in both total box office and tickets sold. Second, 2005 was a really bad year. I am going to ignore the data that shows the cost to produce a film has risen much more rapidly than the domestic box office revenue. I'll address that in another post focusing on studios as opposed to theatres.

These highlights suggest that some of the bearish hype over the box office is warranted. However, I think several other factors are worth noting. Most importantly, the last few years aren't the first time the box office has slumped. 1985/86, 1990/91, and 1999/2000 each were back to back years where ticket sales fell. Growth picked up following each of those downturns....

Another key point is that the 2004 performance was boosted by the huge numbers from Passion of the Christ. Passion brought in $370 million domestically, finishing third in 2004 behind Shrek 2 and Spiderman 2. Several attempts to tap the same religious audience since Passion have failed miserably. This past holiday season Apocalypto and the The Nativity Story which grossed $50 million and $37 million, respectively, were both considered major disappointments.

For the sake argument, lets' remove $325 million and 50 million tickets from the 2004 box office on the theory that Passion was a one-time item. The box office decline is 2.8% instead of 6.1% and the tickets sold decline is reduced to 5.8% from 8.9%. I'd further argue that despite its R-rating Passion had a below average ticket price since it was very popular among Christian families and there were many reports of Church groups arranging buses to take people to special showings.

If you accept my passionately argued theory, then 2004 becomes just another bad year. Not meaningfully worse than the 1990/91 slowdown or the lousy year in 1985. You still have a pattern of slowing growth but you wouldn’t have the consternation over the box office that exists because you wouldn’t have had all the articles in the Hollywood press and major newspapers and magazines throughout 2005 and 2006 talking about the death of the box office.

I'll be the first to admit that box office growth might be slower in the future than it has been historically due to digital downloads, home theatres, and alternative entertainment. However, the box office isn’t dead and it isn’t dying. It just isn’t as healthy as it used to be. Not a lot different from a lot of other businesses, a lot of us, or the US economy. And it leaves plenty of room for correctly capitalized companies that return cash to shareholders, such as Regal Entertainment (RGC), to be successful investments.

300 is 1 Reason To Be Bullish on Movie Stocks

Did you hear the hype that the domestic movie business is dead? Don’t believe it. I wish I had 300 reasons to tell you why it isn’t dead but I can give you one --- 300.

300 from the Warner Brothers division of Time Warner (TWX) broke box office records opening to $70 million, the best ever for a film that debuted in March. And for the skeptics out there, it also is the best ever opening adjusted for ticket price inflation --- measured by tickets sold, 300 just edged last year's Ice Age 2: The Meltdown and sold 2.5 million more tickets than the #3 March opener of all-time, Ice Age.

300 wasn't the only film to do well this weekend. The second weekend of Wild Hogs from the Buena Vista division of Disney (DIS) fell just 29% from its much better than expected opening weekend. #3 Bridge to Terabithia, also from DIS, fell just 23%. In fact, only two of the top ten films fell by more than 40% and none fell by more than 49%.

I've consistently noted that when there are good films in the theatres appealing to a broad array of moviegoers the box office performs well. The supposed problem for the box office isn’t digital downloads, alternative forms of entertainment, or ticket prices. It is making sure that there is a consistent supply of quality product. Movies are still a preferred form of consumer entertainment and relative to many other nights out aren’t that expensive.

Movies can still be a good business for studios as well.....

300 had a production budget of $65 million. The marketing campaign was large, maybe as much $40-50 million. But TWX has a movie likely to go well north of $200 million domestically enough to recoup production and marketing costs. International box and DVD should allow TWX to make several hundred million in operating profits from just this one film.

The whole movie business is a winner this weekend but several companies get a direct benefit. TWX has put its horrible 2006 box office performance behind it and is set for a big year from its movie studio as 300, another Harry Potter movie, Oceans 13, and DVD sales from Oscar winner The Departed are up against very easy 2006 comparisons. Estimates from the Filmed Entertainment segment should be going up meaningfully.

Regal Entertainment (RGC) is also a winner. The box office is now ahead more than 3% this year and even more for RGC's 1Q07 which includes the final weekend of 2006 which was up 31%. Analyst estimates call for a flat to barely down 1Q07 box office and the remaining March weekends all have easy comparisons and what looks like good product. 2Q07 should also be very good when May brings the third film in the Shrek, Spiderman, and Pirates of the Caribbean franchises.

DIS is also a winner as Bridge to Terabithia is proving to be a nicely profitable film and Wild Hogs looks to be a major hit. DIS apparently is set for another winner the final weekend in March with Meet The Robinsons, an animated film based on the very popular children's book by William Joyce, A Day With Wilbur Robinson. Early tracking on the film is supposedly quite good.

2006 Box Office Wrap-Up

Good breadth of popular movies appealing to all the major movie-going demographics allowed the box office to recover during the holiday season, pulling the fourth quarter to about breakeven with 2005 according to data from BoxOfficeMojo.com.

The final weekend of the year, including January 1st, saw box office receipts rise 15%, building on a gain of 6.8% in the prior week. The finishing kick allowed the fourth quarter to overcome a tough comparison in 2005 when three blockbusters (Harry Potter, Narnia, and King Kong) were released between Thanksgiving and Christmas.

For the full year, BoxOfficeMojo reports that domestic ticket sales rose 4% to $9.2 billion. Following the widely discussed weakness in 2005 when ticket sales fell almost 6%, the recovery suggests that the doom and gloom surrounding the theatrical movie business for much of the last two years was overdone. Internet downloads, home theatres, and alternative entertainment options all pose challenges but 2006 shows that depth of decent quality films will still bring customers to theatres....

Regal Entertainment (RGC) shares rallied to a new 52-week high in the closing trading days of 2006 as investors began to look past the tough finish to the year toward two major catalysts in the first half of 2007. First, the IPO of RGC's 41% owned joint venture, theatre advertising firm National Cinemedia, seems set for a 1Q debut. RGC will receive a significant cash infusion from the NCM deal which will be used to enhance shareholder value through some combination of debt reduction, share repurchase, and special dividends. NCM is expected to be good IPO. Second, box office comparisons ease through 2Q07 with three guaranteed blockbusters coming in May 2007: Pirates 3, Shrek 3, and Spiderman 3. Estimates surely reflect these high profile sequels but sentiment toward RGC shares still can improve further as May draws closer.

Movie exhibition is not a growth business but RGC has aligned its financial strategy with the best interest of shareholders by paying out most of its cash flow in regular quarterly dividends which provide the shares with a current yield of 5.6%. With the dividend as support, RGC can be winning investment when investor sentiment towards the movie business becomes less negative. We should be at one of those times now, setting up a potential 15-20% in RGC shares this year, most of which I expect to earn by the middle of May.

Holiday Box Office Kicks Off This Weekend

This weekend marks the start of Hollywood's biggest box office period besides the summer. Led by the wide releases of the latest James Bond film, Casino Royale, and Happy Feet, Warner Brothers latest attempt to break into the big time animation game, Hollywood hopes to add a finishing kick to 2006's rebounding box office performance.

So far this year, the box office up 5.7% against the weak 2005 performance that has had industry observers worried about the impact of home theatres, shorter DVD release windows, high ticket prices, movie downloads, and alternative entertainment options. While I think those worries are overdone, it will be tough for the box office to show growth between now and year end as this year's turnaround actually began this weekend last year when the latest Harry Potter film opened to over $100 million. That was followed by holiday hits King Kong and Chronicles of Narnia: the Lion, the Witch, and the Wardrobe, which grossed $218 million and $291 domestically, respectively....

Another measure of the strength of last year's holiday season is the fact that 58% of the total 4Q05 box office of $2.2 billion was earned from this weekend onward. In 2004 and 2005, the holiday season brought in 54% and 52% of the fourth quarter receipts, respectively.

One more sign of the tough comparison is that the 4Q consensus revenue estimate for theatre industry leader Regal Entertainment presently calls for a decline of just under 1%.

Fortunately for the industry, the first half of the fourth quarter has been pretty solid with receipts up $50 million, or almost 5%. Strength so far this quarter is the result of good depth of well-reviewed product as a number of films have shown strong legs with weekly declines under 40%. Breadth of product will again be relied upon as this holiday season has no obvious $200 million plus blockbusters.

This weekend is a good example of what to expect. Casino Royale and Happy Feet have both received great reviews. The new Bond film has a 95% rating on RottenTomatoes.com and the penguins are pulling in a very good 80%. Despite the good reviews, industry estimates call for those two films to do combined business of $70-80 million, far short of the $103 million pulled in by last year's Potter film. Also expected to be strong this week are holdovers Borat (92%), Flushed Away (78%), and Stranger Than Fiction (76%).

The good reviews for Casino Royale and Happy Feet have both films in position to surprise to the upside and take a run at $200 million. If that occurs, the tough comparison for 4Q should not lead to a bloodbath and a return of negativism that dominated box office chatter for much of the past 18 months.

And if we get through the holiday season in decent shape, optimism will rise again in anticipation of next May when three of the biggest franchises of all time, Pirates of the Caribbean, Spiderman, and Shrek, each will be in theatres with the their third installment. 2QO5 had total box office of $2.4 billion. It is likely that those three films alone will produce box office of over $1.2 billion!

Against this backdrop, I am staying long Regal Entertainment. I get paid a 6% current yield which provides downside protection if this holiday season falters and puts something in my product as I wait for next May. RGC shares will also benefit if the highly anticipated IPO of their 41% owned in theatre advertising joint venture, National Cinemedia, goes off as planned later this year. RGC will use its share of the proceeds to deleverage, buyback shares, pay a special dividend, or some combination of the three.

Optimism about the box office will also help sentiment toward the Disney (DIS), News Corporation (NWS), and Time Warner (TWX), each of which owns one of Hollywood's major studios. These companies benefit mostly from DVD and merchandise sales. Disney and News Corp have been very successful at the box office this year but Time Warner has struggled mightily. Happy Feet could set the stage for a turnaround at Warner Brothers that will help reinvigorate overall corporate growth at Time Warner next year.

I think shares of all three of these conglomerates will continue to work higher. I am long DIS across my client base and have selected holdings of NWS and TWX. My order of preference is DIS, NWS, and TWX.

Third Quarter Box Office Wrap

Following three straight weekly declines, the box office rose 6.6% vs. a year ago this past weekend. The weekend is actually the first one of the fourth quarter. Consequently, I wanted to look back at the completed numbers for the third quarter.

Despite the weakness exhibited in the final three weeks, the third quarter still held onto a good gain, up 8.2% vs. a year ago. The strength was driven early in the quarter by the massive global success of Pirates of the Caribbean: Dead Man's Chest, while Talladega Nights: The Ballad of Rick Bobby picked up the baton in August (I guess all the Hollywood execs will be looking to greenlight films with semi-colons for next summer!)....

Looking just at films released during the third quarter by the major studios, Disney (DIS) was easily the biggest winner thanks to Pirates which pulled in $420 million of the studio’s total of about $560 million. Not to be overlooked, especially from a profitability standpoint are the companies two other major releases in the quarter, Step Up and Invincible. Adding in Cars, which was the #2 movie of the summer, DIS is poised for a big holiday season for highly profitable DVD sales.

The other winning studio for third quarter releases was Sony (SNE), which had Talladega Nights leading the way to over $350 million in gross receipts. SNY had a lot of success earlier this year and is the leading studio so far in 2006.

Fox, owned by News Corp (NWS) had a weak quarter of releases but enjoyed hits early in the summer with X-Men: The Last Stand (those damn semi-colons again!) and The Devil Wears Prada.

Paramount, owned by Viacom (VIA), enjoyed a good quarter with Jackass: Number Two (there they are again!), World Trade Center, and Barnyard: The Original Party Animals (not again!). Following a long dry period, Paramount's success will come as a relief to VIA shareholders. And don’t forget the Paramount's early summer release of Mission: Impossible 3 (sorry, had to get one more in).

The worst performer among the major studios during the third quarter and the summer was the Warner Brothers division of Time Warner (TWX). The company has a series of flops from a box office and profits standpoint. I suspect this is widely noted by investors at this point, so beyond the possibility of worse than expected 3Q06 results in the Filmed Entertainment segment and another lousy quarter in 4Q when DVD sales will lag, investors are probably looking ahead to 2007 when easy comparisons and a strong release schedule lead by the next films in the Harry Potter and Ocean's Eleven franchises are due to hit theatres. Prior to 2007, Warner Brothers might have a hit on its hands with its animated musical about singing and dancing penguins, Happy Feet. Don’t believe me that penguins might strike Hollywood gold again….watch these trailers.

Finally, there could be some upside relative to consensus for Regal Entertainment (RGC) in the third quarter as the current consensus has year-over-year revenue growth of just 3.3%. I suspect investors are ahead of analysts as RGC shares have rebounded nicely since the swoon following slightly disappointing 2Q06 earnings but a good report might be enough to push RGC shares firmly into the $20s, especially given the 6% current yield against the recent bond market rally.

Another Good Weekend For The Box Office

The weekend box office was up again, making it four straight weekends. Eight of the last nine weeks have also been up so the summer continues to shape well as it winds down.

This past weekend was up 5% from a year ago as lots of films did well. Talladega Nights held the top for the second straight weekend, edging up the surprise hit Step Up and World Trade Center. Barnyard and Pirates of the Caribbean: Dead Man’s Chest also contributed to positive comparisons as each held very well declining 38% and 34% from the prior weekend. Also performing reasonably well was the latest horror flick, Pulse.

I’ve strongly advocated that last year’s box office slump was largely the result of movies that did not resonate with the public rather than a sudden loss of interest in attending movies in favor of home video or digital downloads or alternative entertainment options. This summer’s results support my view, especially since the only real blockbuster has been Pirates. Rather than a few films carrying the day, we have seen lots of films performing reasonably well and appealing to all the key demographic segments of moviegoers. And you can’t claim rising ticket prices are the problem. It looks like price increases are only half of the year-to-date gain of 6% in the domestic box office. Attendance is up around 3%.

Unfortunately, this summer’s strength hasn’t helped my long position in Regal Entertainment (RGC). Hope is not lost though....

....as the current quarter could be quite strong as it is up 13% halfway through the frame. If comps hold even the rest of the way, the gain for the quarter will be over 8% (hopes are high for a big opening for the much hyped Snakes on a Plane this coming weekend). If RGC can match the box office, it will easily exceed 3Q estimates which currently show just a 3% gain in revenues. And, mid-September brings another 30 quarterly cent dividend, contributing to the current yield of over 6%.

Looking at the studios, this weekend brought good news to Disney (DIS) and Viacom (VIA, VIA.b). DIS had the surprise hit Step Up which brought in $21 million, almost twice its published production budget of $11 million. It is rare these days for a film to make a profit in the theatrical window when the studio receives about 50% of the domestic box office. Step Up is profitable already and is a testament to DIS’s ability to leverage its broad reach through cable channels, theme parks, and network TV to get audiences to notice its films. Observers are giving special credit to the Disney Channel, which used the phenomenal success of High School Musical and strong ratings for its summer lineup to promote Step Up to its target audience of young teenage girls. DIS executives will also be pleased with the contunied good legs for Pirates, which should pass $400 million in the next week as it winds down toward $420 million in the U.S. and $500 million plus abroad. Again, Pirates is about profits, not just box office statistics.

VIA will be pleased that Barnyard is outperforming expectations and World Trade Center is off to a good start. Both films should be profitable when they hit the home video window. WTC is aimed at adults so te second weekend will be especially important to gauge whether word of mouth can drive the film above expectations. VIA’s Paramount studio has been in a long slump, so any good news is welcome news to shareholders. VIA is dominated by its cable networks, however, and despite recent good results in its latest quarterly report, I remain cautious toward the cable networks business.

Disney Pulls Back But Its Not Due To Pirates

Pirates of the Caribbean: Dead Man's Chest (POTC) continues to rule the box office. Nevertheless, Disney (DIS) shares have sold off since the movie was released. I wouldn’t chalk that up to any disappointment over the film, however.

In the early part of last week, before catching a downgrade on Thursday, DIS shares actually outperformed the market. I'd suggest that was the trading action related to the movie. Since then, I think the downgrade (built off the belief that street estimates for DIS EPS growth in 2007 are too high) and geopolitical tensions drove the shares lower. The quick strengthening in the dollar also probably contributed as DIS is sensitive to international travel at its Orlando theme park.

I maintain my view that 2007 results will not disappoint. Continued margin expansion at the theme parks, growth at ESPN, a solid upfront for ABC, and the flow through of profits from DIS very successful winter 2005 thru summer 2006 movie slate provide enough upside to meet consensus estimates. I think this fundamental strength will be evident when the company reports its June quarter. Recent sellers, shorts, and downgraders will regret their positions come the August 9th reporting date. One signal I could be right is that DIS shares finished up yesterday despite a second downgrade. I helped a tiny bit by adding DIS to a new client account.

Going back to the box office....

POTC fell about 54% last weekend from its record setting opening weekend, a performance that gives little guidance to box office observers who are trying to gauge its legs. A drop of 60% plus would have been a reason for concern while a drop of 40% would have put the film in the running for #2 all-time behind Titanic and ahead of Shrek 2. I standby my assumption that the film will gross over $400 million domestically.

Based on early international box office reports, a total of over $500 million abroad seems in the cards. In fact, with the film still only open in about 1/3rd of its foreign markets, Variety speculated the international haul could exceed $600 million making POTC the third ever film to cross $1 billion worldwide (Titanic, $1.8 billion; Return of the King, $1.1 billion).

Despite a solid weekend for POTC and in line openings for the two new films, Little Man and You, Me, and Dupree, total weekend box office fell for the first time in 8 weekends. The decline of 7% is nothing for box office bulls to be alarmed about. Last year, two of the summer's most popular movies, Charlie and the Chocolate Factory and Wedding Crashers both opened. Additionally, not be lost is the fact that the prior weekend was up an astounding $70 million, or 46%, from a year ago, and this past weekend was up 7% from 2004.

Year-to-date box office is up over 6%, implying attendance growth of about 3% this year for the supposedly dying theatre business. That myth will suffer another blow this weekend when I expect comparisons to return to positive territory. This continues to bode well for Regal Entertainment (RGC), whose shares have performed very well relative to the market's decline. I guess I'm not the only one who sees value.

A Look at Records Set By Pirates of the Caribbean

The numbers for Pirates of the Caribbean: Dead Man's Chest (POTC) are truly enormous even in an era when studios, theatres, and moviegoers have become used to huge opening weekends. Over at The Hot Blog, David Poland has referred to these big opening weekends and lesser legs as "front loading." All the comparisons below are against other films that have been impacted by front loading.

• POTC had the largest opening weekend ever with $132 million, beating the four year old record of Spiderman by $18 million.
• POTC had the largest 3-day opening ever beating last May's release of the final Star Wars film, Revenge of the Sith, by $8 million. Sith opened on a Thursday.
• POTC earned $100 million in just two days, the first film ever to reach that level.
• Friday's one day haul of $55 million was the largest ever single day, beating the opening of Sith which pulled in $50 million. POTC also had the 5th biggest single day ever on Saturday and the 27th biggest single day on Sunday.
• POTC is just the 6th film to bring in over $100 million in its first three days. The others are Sith, Spiderman, Matrix Reloaded, Harry Potter and the Goblet of Fire, and this summer's X-Men: The Last Stand. Interestingly, four of those movies were released in May (the Potter film opened in November). Compared to other movies opening in the true summer months of June, July, and August, POTC just crushed anything. The largest ever June opening is the third Harry Potter movie, Prisoner of Azkaban with $93 million. The largest ever July opening prior to POTC was Spiderman 2 with $88 million. The largest opening in August belongs to Rush Hour 2 with $67 million. At first I was surprised that May was so dominant for opening weekends, but upon reflection the fact that kids are still in school forces ticket sales to weekends. Also, there are fewer entertainment alternatives in May and less folks on vacation.

Other records on the horizon for POTC could include the 4-day and 10-day records of $158 million and $236 million both held by Sith. Also, keep an eye on the one week record of $192 million held by Spiderman 2. The fastest film ever to $200 million is Spiderman 2 in just 8 days. Sith is the fastest ever to $300 million in 17 days. Six films have made it to $400 million with the record for getting there fastest belonging to Shrek 2 in 43 days.

How high could POTC go? The first film released last summer opened at $46 million but showed amazing legs to stay in the top ten for ten weeks and earn $305 million. There is precedent for sequels outperforming their originals, most notably Shrek 2, which earned $441 million versus $267 million for the original. I think the latest POTC and Shrek 2 have some similarities in that both franchises became much more popular due to the success of their DVDs. Both also have very brad popularity across all key movie going demographics.

Of the five previous films to open to $100 million or more, their total domestic gross ranged from $235 million (X-Men) to $404 million (Spiderman). These five films grossed anywhere from 2.3 to 3.5 times their opening weekend. For POTC, that would lead to a box office of $300 million to $462 million.

Pirates Provides Big Boost To Box Office

Pirates of the Caribbean: Dead Man's Chest (POTC) blew away even the most optimistic estimates and broke all opening weekend records pulling in $132 million in just three days.

All by itself, POTC would have made for a successful weekend for the movie business, but not be overlooked is that the other films in the top ten also performed well. Second place Superman Returns fell 57% vs. its opening weekend but that is really not that bad considering the huge numbers for POTC. All the other films in the top ten fell between 40% and 50% except for Cars which fell just 30% and continues to show good legs. Overall, the weekend box office rose 42% according to estimates supplied by BoxOfficeMojo.com. The year-to-date box office is now up over 6%, which means that attendance has rebounded to positive growth despite all those home theatres, downloads, and alternative entertainment options.

I stand by my thesis that the death of theatrical movies is an invalid assumption. This creates investment opportunities for studios that are having successful years and movie exhibitors. Disney (DIS) is the best play among studios as the company looks like it will get the top two spots at the summer box office with POTC and Cars (yes- the "disappointing" Cars seems headed for over $235 million and second spot). POTC, also a DIS film, is sure to finish #1. And don't forget last winter's success for Chicken Little and The Chronicles of Narnia. Profits from these four films will flow to DIS over the next year.

Among exhibitors, I remain happily long Regal Entertainment (RGC), which should benefit from the recovering box office through good financial performance and expanding valuation. A 6% current yield and a history of special dividends is nice support while I wait for the shares to move up to my target of $23-24.

The coast is clear for DIS and RGC but comparisons do toughen this coming weekend when Charlie and the Chocolate Factory and Wedding Crashers opened very strongly a year ago. DIS reports August 8th and obviously is dependent on far more than the success of its movie studio.

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.

Box Office Picking Up

I continue to think that the big entertainment conglomerates which own movie studios could benefit from a positive shift in sentiment this year if the box office returns to growth. Disney, News Corporation, Time Warner, and Viacom would be the beneficiaries. Improved box office alone isn’t enough to rescue these stocks, but with sentiment quite negative and the stocks trading at the low end of historical valuation ranges, any improvement could provide relief for the stocks.

This past weekend held welcome news as the box office rose 4% vs. a year ago, the sixth time in the seven weekends it has been up. The box office is now up almost 7% this year. I am counting the final weekend of 2005 in the 2006 numbers but even excluding the New Year's weekend that spanned 2005 and 2006, the box office is up 4%. December was also a good month, so quietly an improved trend may be emerging....

One thing I have noticed that has helped the comparisons is that a lot of films seem to be finding an audience. This past weekend, the top film grossed just $21 million but five films grossed at least $10 million. Overall, the weekend grew 4% against a year ago when the top film was Hitch, which by itself brought in $43 million.

I don’t doubt the secular challenge posed by home theatres, high prices, and alternative entertainment. After back-to-back weak years, it is hard to maintain a positive position. However, I still maintain that it was lack of appealing films that hurt last year. This problem was compounded by an unexpected weakening of demand for DVDs. I think the performance of the box office over the past few months shows that when good films that appeal to all movie-going constituencies are in theatres, ticket buyers will come out.

The recent winning streak could be extended as February through June is when the comparisons are easiest. I was reading a CSFB report about Regal Entertainment (RGC) which noted that a year ago February and March were down 7% and 2Q05 was down 13%.

I remain long DIS which has seen a recent turn its box office fortunes led by The Chronicles of Narnia: The Lion, The Witch, and The Wardrobe. Look for DIS executives to crow next weekend when the film sneaks by the gross for the latest Harry Potter film from TWX's Warner Brothers. With Pixar release Cars and the sequel to Pirates of the Caribbean coming this summer, DIS seems most likely to benefit from the sentiment shift I am expecting. All three of these films should also perform well on DVD where DIS has more exposure than the other entertainment conglomerates.

Weekend Box Office Report: Oscar Nominations Coming Soon

The weekend box office saw the top dozen films gross 5% less than a year ago but with the final weekend in January in the books, Hollywood has to be pleased with 2006 so far. Heading into this weekend, the box office was up more than 9%, a nice turn from the dismal 2005 performance, and even adjusted for ticket price inflation the increase implies ticket sales are in positive territory so far this year.

20th Century Fox had its first number hit in over five months as Big Momma's House 2 opened to a better than expected $28 million. 20th Century Fox is a subsidiary of News Corporation (NWS/NWS.A). NWS is a giant global company but it never hurts to get the #1 spot at the weekend box office and the fact the film is a sequel give could give a modest boost to the original film in the home video rental window....

Universal Pictures, part of General Electric (GE) owned NBC Universal also had good news this weekend as Nanny McPhee came in a strong #2 with $14 million, also better than expected.

Not much else with investment significance in the weekend results but I do want to point out the continuing success of The Chronicles of Narnia: The Lion, The Witch, and The Wardrobe. The Disney film fell just 29%, pulling in over $4 million, raising its domestic gross to $278 million. The film is just over $8 million behind the latest installment in the Harry Potter Series.

Oscar nominations are due out Tuesday morning and the Best Picture nominations can really boost the gross of the selected films. This quote from BoxOfficeGuru.com provides some perspective:

From a business perspective, the nomination can often mean more than an actual Best Picture win since the film gets positioned as a major contender for five long weeks. Many film buffs want to see as many of the five nominees as possible before Oscar night so each pic can fatten its gross tremendously. The big winners in recent years have had different distribution strategies which in turn affected their benefit from the Oscars. Films like The Return of the King and A Beautiful Mind were already playing in wide release for many weeks before nominations were announced while last year's Million Dollar Baby was prancing around in limited release before coming out swinging in wide release after the nominations came out. But Chicago and Shakespeare in Love were both released in a pattern similar to Brokeback Mountain with gradual expansion throughout January reaching wide play by the time Oscar nods were announced. Each film saw its pre-nomination cume double by Oscar night plus rose much higher after taking home multiple statues.

I'm still cheering for a Best Picture nomination for Crash from Lionsgate (LGF). The film has been available on DVD for some time now but the nomination would still provide an economic boost and also further enhance LGF as a place where to producers, directors, actors, and screenwriters want to do business. Both film critics in the Chicago Tribune predicted Crash would get a Best Picture, Best Director, and Best Supporting Actor nomination. If so, it could be another event in the renewed momentum for the shares that I believe can take the shares over $10 by the end of February.

Weekend Box Office Report: Finally, People Show Up

The box office had an excellent weekend with the top then films grossing 15% above year ago levels and 16% above the 2004 level. The strength was driven by both a blockbuster opening and good depth. Given the overwhelmingly negative sentiment about the box office, the strength will come as a surprise to many, and will probably be ignored in the press and on Wall Street. I continue to maintain that the weak 2005 box office performance was due mostly to films did not capture the consumers imagination, and secondarily, to the issues of competing forms of entertainment. Consequently, with the stocks of major studio owners all at multi-year lows in terms of valuation, investors should be looking for a potential contrary play to develop. One thing that could help is easy comparisons at the box office from now through early summer. The key beneficiaries of improved investor sentiment toward the movie business are Viacom (VIAB – Paramount), Disney (DIS), Time Warner (TWX – Warner Brothers and New Line), Sony (SNE), News Corporation (NWSA - 20th Century Fox), and Lionsgate (LGF). I am long DIS across my entire client base and LGF in a subsection of accounts. I own both stocks in my personal accounts.

SNE was the big winner this past weekend as Underworld: Evolution opened with $27.6 million, the fourth largest January open ever. The top film on this weekend a year ago grossed just $18.6 million. The real strength this weekend though came from the fact that 14 films grossed at least $3 million, with 11 over $4 million. SNE also saw its holiday release Fun with Dick and Jan gross over $6 million and pass $100 million for its run. Another Sony film, Memoirs of a Geisha brought in almost $3 million to break the $50 million barrier.

DIS continues to enjoy a rebound in its box office fortunes with last weekend's champ, Glory Road, holding well, falling just 33%. The Chronicles of Narnia: The Lion, The Witch, and The Wardrobe, added another $6 million and now stands at $272 million. DIS will certainly try to milk Narnia to get its domestic gross past the latest Harry Potter film which has finished its run at $284.6 million.

No other studio jumps out at me in terms of investment implications. This week brings Oscar nominations which can boost the fortunes of nominated films. Being long LGF, and also a big fan of the film, I am cheering for Crash to get a long shot Best Picture nomination.

Weekend Box Office Report: King Kong Just A Big Ape

King Kong opened strongly with $51 million on the weekend and $66 million since its mid-week release. However, the totals will be considered a disappointment as expectations were higher, ranging from $75 million to $100 million for the 5 days of release. The film is from Universal Pictures, which is part of NBC Universal and 80% owned by General Electric (GE).

All is not lost, however, as there are several good signs that the film will have legs during the next few weeks....

Remember the film opened while kids were still in school and every night is a weekend now that schools all over the country are off the holiday period and many individuals are taking vacation as well. Among the good signs is a strong increase of 40% in the Saturday gross vs. the Friday gross. This compares to a gain of less than 10% of the Narnia film last weekend, while also comfortably exceeding the pickup for the first Lord of the Rings film, although that film had an incredible mid-week opening due to pent up demand from devotees of the books (yours truly saw all three films at the midnight opening and saw all three again the next morning or afternoon). King Kong also had a strong hold on Sunday with a decline of just 24%, if studio estimates are to be believed. Again, this is a good number compared to similar films. Finally, overseas box office was quite good with $80 million on the weekend and $146 million since the Wednesday opening. So, it is too early to call the domestic box office a disappointment and weekday and second weekend figures will tell the tale.

I think Disney (DIS) will be happy with the second weekend of The Chronicles of Narnia: The Lion, the Witch, and The Wardrobe. The film grossed $31 million, falling a respectable 52% considering the marketing muscle behind the big ape which was directed at a similar audience. The film has grossed $112 million to date in the U.S. and with a heavy family-orientation and overtures to churchgoers seems likely to hold well during the Christmas school holiday.

Finally, Harry Potter and the Goblet of Fire pulled in another $6 million this weekend and now stands at $252 million domestically. By the end of next weekend it should be the #2 grossing film in the so far four film series, and it stands a good chance of matching the $317 million for the first and thus far highest grossing film in the series. Warner Brothers a division of Time Warner (TWX) produced and distributed the film. While the action is at AOL for TWX these days, the latest Potter film should provide a nice boost to 4Q05 and 2006 financials.

Weekend Box Office Report: Thanksgiving

With the box office in a seasonally important season, I plan to issue occassional updates when key movies open or key weekends pass. This past Thanksgiving weekend generally contained good news for the big Hollywood studios and that means investment implications exist for Disney, Time Warner (Warner Brothers), Viacom (Paramount), Sony, News Corporation (20th Century Fox), and Lions Gate Entertianment. Follow the "Continue Reading" link below for this week's update.

Weekend box office had more good news for Time Warner (TWX) and Disney (DIS) and disappointing news for Lions Gate Entertainment (LGF). Sony has a hit with Walk The Line and despite horrible reviews Paramount (part of the new Viacom (VIA) will not suffer from the release of Yours, Mine, and Ours.

The latest Harry Potter film continues to track very well, with its 5 day holiday weekend gross nearly matching the gross of the initial, and most successful, film in the series over the comparable weekend. This first Potter film went on to gross $317 million in the U.S. and $659 in international markets. The current film is trailing the first film in international markets but I don�t know for sure if the timing of openings is the same. In any event, Goblet of Fire looks set to bring in around $1 billion in global box office against a production cost of $150 million and marketing costs of at least $50 million. TWX will make several hundred million off this film, much of which will hit the income statement in 2006.

DIS executives have to be happy with Chicken Little which saw just a 16% decline on the 3 day weekend. Granted this past weekend was a holiday with kids off school on Friday but at $118 million gross to date in U.S. markets, the film is still tracking close to Shark Tale and will likely produce as much profit for DIS as the average of the Pixar Animation (PIXR) films have. Next up for DIS is the Narnia film to be released on December 9th.

LGF saw a disappointing 5 day gross of $6.1 million for the Usher film In The Mix. On the last conference call, management stated it was looking for a $10 million tally after the first weekend. LGF will lose a few million on this film prior to the DVD window but I don�t expect the disappointing opening to cause any earnings problem in the quarter. Next up for LGF is the horror film Hostel on January 6th followed by the sequel to Diary of a Mad Black Woman in February. I think LGF shares will trade down today.

Fox has a hit in Walk The Line which has grossed over $50 million already and fell just 12% on the 3 day weekend. The film cost about $40 million and I'd guess prints and advertising could be anywhere from $20 to $40 million. Regardless, this film will be very profitable for Fox and is likely headed for a Best Picture nomination and several acting nominations.

Rent is performing well for SNE but that stock will rise and fall on consumer electronics sales, particularly in the TV area.

VIA will be happy to get out of Yours, Mine, and Ours without a major loss. The opening 5 day weekend of $24 million is better than feared but will likely take a huge hit next week. However, given the struggles at Paramount of late, this is good news.

Finally, NBC Universal owned Focus Features shows the inherent volatility of the film business as it has a hit in Pride and Prejudice, which also looks like a Best Picture contender, and flop in The Ice Harvest, which had two big name stars. Neither film is going to move the needle at General Electric or Vivendi.