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.