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June 16, 2008

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.

Posted by Steve Birenberg at June 16, 2008 02:00 PM in Box Office