July 4, 2006 was a pretty good weekend for the domestic box office, making it seven straight up weekends against the easy 2005 comparisons. With the most anticipated movie of the summer, Pirates of the Caribbean: Dead Man’s Chest, hitting theatres on Friday, my bullish thesis built on a strong 2006 summer box office remains in place. There is no change to my two long positions that play the thesis: Disney (DIS) and Regal Entertainment (RGC). Both could get a short-term trading boost ahead of the release of Pirates, which is a Disney film.
Looking at just the three-day weekend, the box office rose a little over 5%. The up weekend occurred despite a softer-than-expected opening for Superman Returns. The film has brought in over $100 million since its release a week ago, but that figure trails last summer’s July 4 holiday blockbuster, War of the Worlds. Fortunately, The Devil Wears Prada about doubled expectations, bringing in $27 million over the three-day weekend. Prada actually earned more than the combined gross of the No. 2 and No. 3 films of the holiday weekend a year ago. In fact, this year’s No. 3 movie, Click would have been No. 2 a year ago with its $20 million gross. Cars also contributed to the up weekend, showing good legs with its box office poised to cross $200 million by early next week. (DIS longs will be happy to know that some observers thought $200 million might be a stretch after the weaker-than-expected opening weekend — $230 million-$250 million is definitely within reach.)….

Comparisons should improve strongly this coming weekend as many expect Pirates to break opening weekend records and pull in well over $100 million.
Death of Box Office Is Overhyped
Despite another weaker-than-expected opening from Superman Returns, the summer is seeing positive comparisons this summer as a greater number of movies have been able to find an audience. This supports my broader thesis that the death of the box office in the face of home theatres and digital downloads is overhyped. Sometimes the focus on blockbuster releases, with their sky-high expectations and massive production and marketing budgets, causes analysts to lose site of the big picture.
The Big Picture
This summer is a good example. Gitesh Pandya, who maintains BoxOfficeGuru.com, notes that “Although overall ticket sales continue to inch ahead of last year each weekend, the season’s top blockbusters remain weaker than those from 2005. The cumulative gross for the top five summer films this year reached $900.3 million, down 8% from last summer’s five biggest hits at this same point.” So despite a shortfall of around $80 million from the blockbusters, the summer box office is up in 2006.
Theatrical Release Will Remain Core to Hollywood Business Model
I think that is a sign of strength. At a minimum, it suggests that although challenges exist, the theatrical release will remain at the core of the Hollywood business model for many years. That is especially good news for RGC, because it should increase investor confidence in the sustainability of free cash flow and the return of that cash flow to shareholders. Higher cash flow valuation and a lower current yield should be the result.