If my bullish thesis on the summer box office is to come to fruition, it should be evident over the next few weeks with the back to back openings of Superman Returns and Pirates of the Caribbean: Dead Man’s Chest (POTC) on June 28th and July 7th, respectively. These are two of the most anticipated films of the summer and early reviews for both are very good.
In the meantime, Adam Sandler once again proved his star power as his latest film, Click led the box office to its sixth consecutive up weekend. On a year to date basis, the box office is not up about 5% with the second quarter trending up over 10%. Sandler’s last four films each opened to $37 million to $43 million and went on to earn $125 million to $160 million. Click opened right in the middle of the range of previous films with $40 million. With the long holiday weekend coming up and no other comedies in theatres, observers see the film heading toward $150 million. Click is a Sony (SNE) property, continuing a very good year for the studio. However, given the company’s reliance on hardware, box office success is not enough to move the stock price…..

On the other hand, box office success is important to fundamentals and the stock price at Disney (DIS). And despite a slightly disappointing start, Cars engine has been revving and estimates of its ultimate US box office have been trending higher. Over the weekend, Cars fell just 33%, a better third weekend hold than other recent Pixar films. After opening at $60 million, box office experts were thinking that the film might end its run around $200 million. I now see one estimate at $240 million and another at $220 million. This news won’t get as much as press as the opening weekend that led to a couple of downgrades and a pullback of almost 10% in DIS shares. The stock has since recovered modestly and with POTC being the summer’s most anticipated and widest appealing film, I think further gains are ahead as short-term traders look ahead to the opening. If the film does perform as well as expected, look for some positive commentary surrounding the third film in the trilogy due in theatres in May 2007. Apparently, the end of the new movie leaves some cliffhangers to be resolved in the final installment.
Overall, my bullish summer box office thesis still looks like a good call. My most direct play on the strength, Regal Entertainment (RGC), firmed up last week on the back of its addition to Lehman’s popular 10 Uncommon Values list. Since the initial purchase for Northlake clients in late April, RGC shares have produced a total return of negative 2%, less than half the losses for the S&P 500.
As I have noted before, it looks like most analysts have revenue growth of less than 10% for RGC’s quarter ending June 29th. This potentially sets up a positive surprise and/or some estimate increases. Either is likely to push the shares higher and I stand by my target of $23-24 for the shares by Labor Day for a total return potential in excess of 20%.