Regal Catches A Downgrade Off Average Quarter

As I mentioned yesterday, former Northlake long Regal Entertainment shares caught a downgrade after reporting an inline quarter late last week. The stock moved up the first day but after the downgrade on Friday more than eliminated the gains. I have yet to read the downgrade but I suspect it had to do with the loss of fundamental momentum due to the stiff box office comparisons from May through August. RGC will show good growth this year thanks to acquisitions, a growing contribution from its partial ownership of National Cinemedia (NCMI), and a 53 week year (the extra week is a holiday week and could add 7-8% to EBITDA for the year). However, organic growth will be limited because to the comparison to last summers record-breaking summer box office....

....3Q comps are the toughest so sentiment toward RGC shares need a boost from the May slate of potential blockbusters including Iron Man, Speed Racer, Indiana Jones, and the next Narnia film. One thing working in favor of the box office is that last year there were only three films significant films releases in May (Spiderman 3, Shrek 3, Pirates 3). Granted each of these films grossed $300 million but no other May release reached $50 million. This year in addition to the big four films there are several other films with the potential to do $50-100 million. Should May box office disappoint, RGC shares could head toward their 52 week low given that 3Q will be very difficult. I'd be a buyer near the low thanks to the stable and hefty dividend and the strength anticipated against easy comps from Thanksgiving through New Year's.

Selling Regal Entertainment

I posted the following on Real Money before the open on February 27th explaining my decision to sell client holdings of Regal Entertainment. By way of background, Doug Kass is a major figure on Real Money and appears regularly on CNBC. He manages hedge funds that are dedicated to selling short. This means he bets on stocks going down. Over the time period that Northlake has been long Regal Entertainment, Doug was short most of the time.

I hope Doug Kass is sitting down when he reads this but I sold my position in Regal Entertainment yesterday. Doug and I have been back and forth on the merits of Regal for well over a year. For Doug it is a thematic short as he sees the movie theatre in long-term decline. For me it was a total return play in a stock that was too cheap because of what I believe to be the inaccurate myth that the box office is in long-term decline.

I think we both ended up right. I know at times Doug was short when the stock was moving between the upper teens and low $20s. I've been long since April 27th, 2006. I purchased the stock at $20.28 and sold it at $20.90 for a gain of just 3%. However, I have also collected 7 quarterly dividends of 30 cents and one special dividend of $2.00. Add that $4.10 to my side of the ledger and the total return is 23%. The S&P 500 is up less than 6% since then with dividends pushing the return to about 9%.

Regal turned out to be a pretty good investment for my clients but the reason I am quoting the returns is to remind subscribers that there are a lot of ways to make money on a stock. Total return investing is not as sexy as producing big capital gains but if you are going to make 23% who cares how you get there….

....The reason that I sold Regal yesterday is because the stock reached my recently revised $21 target which is based on 8 times 2008 EBITDA. The box office comps get real tough starting this weekend and pretty much stay that way until after Labor Day. While the box office is up 12% YTD, it could very well be down in the mid to upper single digits or worse by late summer before a great holiday lineup (including another Harry Potter film) rescues the year. Having owned Regal for almost two years I've seen how the box office trends impact sentiment toward and performance of the shares.

Even if the box office is down 10% by the end of summer, don’t look to me to support the box office is dying myth. The data doesn’t support it. It is a very low growth or stable business with bumps in both directions from year to year based on the films in theatres. Away from the box office Regal has a few growth avenues including in theatre advertising, tuck in acquisitions, 3-D, and the occasionally special event now possible due to digital upgrades. Around the recent lows of $17, I'd be back in the stock with few worries.

In Line Quarter and Positive Guidance Clears The Way for Regal

Prior to its 4Q07 earnings report last Thursday, shares of Regal Entertainment had already recovered from the sharp sell-off driven by poor box office trends during the fourth quarter. A strong start to the box office in 2008 also was helping. The recovery gained steam following the report which was inline with expectations and a first view of 2008 guidance. Here is a brief recap:

Regal Entertainment guided to the high end of analysts estimates for 2008. In 4Q, operating trends were exactly as expected given the box office performance. 4QEPS came in 4 cents ahead of consensus on better than expected margin performance and lower than expected interest expense. The tax rate was down but still stood at a normal 37%. The conference call had a positive tone.

Based on the new guidance, I think the stock can trade to $21-22, up 16%, which along with a current yield of 6.5% makes this an interesting total return situation. The key near-term risk is the tough March comp at the box office due to the popularity of the movie 300 a year ago.

The upside should get a boost from rising analyst estimates for 2008 based on the new guidance and the strong start to the box office this year. I know of two analysts who are estimating 1Q box office to be down 9-10%. It is hard to see how anything short of a small gain will be the ultimate outcome with the box office up 19% through this past weekend.

Comps get particularly tough in late June so my current plan is to sell into strength I anticipate over the next few months.

Box Office Strength Flows Through Regal's Results

Not much to say about Regal Entertainment's third quarter earnings report. Given the well-chronicled strength in the box office, Regal produced very good results as anticipated. Occasionally, Regal and theatre operators are unable to translate box office strength to earnings. This was not the case in the third quarter for Regal.

The company is optimistic that earnings and box office strength will continue in the fourth quarter even thought the box office is performing poorly in October. The big releases this year are all in November and December. Last year's holiday product generally performed poorly so comparisons are easy. For example, in 2006, weekly box office totals were in the $125-150 million range until early November. Blockbuster releases during holiday periods led to several weeks of over $200 million and one of over $300 million for the rest of the year. In other words, if comparisons are favorable for the holiday films the lagging box office so far in the fourth quarter can quickly turn to positive comparisons.

I looked over a few analyst models and the consensus estimates. Box office admissions revenue in the fourth quarter is forecast to be flat to down slightly and overall revenue growth, which includes concessions and in theatre advertising, is expected to be flat to up slightly. I think the bar is set appropriately low such that current box office weakness will not be an issue for the stock....

....Thus, with the shares yielding 5.5% and excess cash on the balance sheet that could be used for a special dividend or accretive acquisition, I think the shares till remain an attractive defensive holding. Since Northlake's initial purchase in spring 2006, the Regal has risen more than 5% and the company has paid $3.50 in dividend driving the total return on the shares to over 20%. There is more than one way to make money in stock and in the current uncertain economic environment the downside protection offered by Regal's dividends is very comforting.

News On Northlake Stocks

Several stocks in the Northlake portfolio have had newsworthy items over the past week. Here is a recap of the latest news, all of which I think is positive.

Disney (DIS) completed the sale of almost all of its radio operations to Citadel Broadcasting (CDL). DIS shareholders received .0768 shares of CDL for each share of DIS they owned. DIS received $1.35 billion in cash from CDL. I plan to hold CDL and will look to add to the small positions if the shares come under pressure as DIS shareholders sell their small holdings. The profile of a DIS and CDL shareholder would seem to have little in common which could lead to lots of selling. Given that the DIS deal about doubles CDL shares outstanding, I think supply-demand imbalances could put some downward pressure on CDL. That was not the case yesterday when CDL rallied on the first day of post-closing trading. CDL has a current yield of over 5% which should limit downside....

Central European Media Enterprises (CETV) announced that it was acquiring 5% of its Romanian operation form its long-time partner and current senior executive Adrian Sarbu. CETV now owns 95% of Romania with Sarbu holdings 5% that has a newly restructured put option. CETV paid $50 million for the 5% stake, placing a value of $1 billion on Romania. I expect Romania to produce about $85 million in EBITDA this year, putting the multiple at 12 times. This actually seems a little cheap to me given that Romania has been growing at 30-40% per year and is projected to sustain a growth rate in excess of 20% for several more years. I suspect that CETV held the upper hand in the negotiations given Sarbu's small minority stake. I am always happy when CETV is able to buy more of its own operations and it is even better when the price is right. I remain a buyer of CETV which has lagged over the last month.

Endeavor Acquisition (EDA) released 2006 and 1Q07 financials for American Apparel and also filed the proxy. These filings indicate the acquisition of American Apparel remains on track for a 3Q07 closing. I have not had a chance to read all the filings but the headlines suggest that everything is on track. Management indicated that same store sales remain strong in 2Q and 1Q EBITDA suggests that the company is on track to meet 2007 guidance. The shares have moved to new highs since the filings. I still think EDA can reach $14-18 assuming American Apparel is able to maintain operating momentum in the first few quarters following the closing of the deal.

Rogers Communications (RG) announced the purchase of five traditional over-the-air TV stations in Canada. All major cities except Montreal were included. It is not a huge deal at $350 million Canadian but based on Canadian press reports it looks like a favorable deal for RG. RG shares remain right at their 52 week high and the prospects for further upside remain as wireless and cable drive mid-teens growth in operating profits and significant free cash flow begins to flow. A price target of at least $45 is realistic.

Regal Entertainment Competitor Completes IPO

Yesterday several brokerage firms initiated coverage on recent IPO Cinemark Holdings (CNK), the third largest operator of movie theatres. Not surprisingly, the underwriters are providing favorable coverage including new buy recommendations. A few brokers expressed their preference for CNK over Regal Entertainment (RGC), the largest theatre operator and one of my long positions. The analysts argue that CNK is cheaper than RGC and due its geography it offers more upside potential though organic growth of new theatres. Additionally, CNK has more room for upside in its dividend than RGC given the 51% payout ratio. CNK has a current yield of 3.7% vs. 5.3% for RGC.

These are valid points as CNK trades at under 8 times 2008 estimated EBITDA while RGC trades closer to 9 times. Additionally, most models have no screen growth for RGC while CNK is expected to increase its screen count by about 4% per year taking advantage of population growth in its largest markets of Texas and California, while adding theatres in major metropolitan areas where its is underrepresented. Finally, a little over 20% of CNK's screens are in Latin America where long-term growth opportunities could be substantial. The organic growth is clearly seen in 2008 estimates (box office comparisons will be extremely tough) where most analysts have RGC's EBITDA flat to down vs. a 2-4% gain for CNK. It does seem inconsistent for CNK to trade at a discount given the higher internal growth, especially in an industry where everyone pretty much offers the exact same product.

Nevertheless, while I need to do further work on CNK, my initial thought is that I still prefer RGC....

The box office is performing well for the second consecutive year but comparisons will stiffen as we move past the third quarter and 2008 could be a flat to down year. Notwithstanding improved sentiment toward theatres driven by the box office, the emergence of cinema advertising, 3-D releases, and new revenue streams from digital upgrades, I think that the theatre stocks will trade mostly with box office trends as they have over the past few years. With the box office trade is nearing its end, I prefer the more defensive RGC shares.

Regal Entertainment Has A Great First Quarter

Regal Entertainment (RGC) shares rose 4% following better than expected 1Q07 earnings. RGC was able to convert the strong 1Q box office into better margins and EBITDA which bodes very well for the next two quarters when the box office should be record breaking. The shares have now regained more than the $2 special dividend paid earlier in April with proceeds of the National Cinemedia (NCMI) IPO. I think box office momentum can drive RGC to $23-24 at which point I expect to be a seller as comps will be tough in 2008. Since I started buying RGC for clients a little over year the company has paid $3.20 in special and quarterly dividends on top of $1.60 in share appreciation. The total return is 24%. Not bad for the supposedly comatose movie theatre industry.

RGC rode a 7% gain in domestic box office to a gain of over 8% in its own 1Q admissions revenue as a favorable mix of PG-13 and R-rated films led average ticket prices to be higher than expected. Coupled with good expense control, the revenue upside pushed operating margins a little above expectations as well. Better than expected EBITDA was the result and this is the key financial measure investors in theatres focus on....

One other item noted by management that helped this quarter and could be a boost ii future years is the increasing use of new 3D technology in theatres. Meet The Robinsons performed much better and at premium ticket prices. RGC plans to retrofit a few hundred theatres for 3-D in anticipation that recent announcements by studios of 3-D movies will come to fruition.

Management also noted on the call that some of the excess funds held following the NCMI IPO will probably be spent on acquisitions. This could be good news as it is an easy way to push cash flow up a higher, sustainable level so that the annual dividend can be increased. I don’t think RGC would raise the annual dividend just because 2006 and 2007 box office performance showed so much improvement.

All eyes now turn to May which kicks off the summer season with Spiderman 3, followed by Shrek 3, and then Pirates 3 on Memorial Day weekend. Last May got off to a horrible start so the comparisons are very easy against three of the biggest franchises of all-time. I think RGC shares will rally further into Memorial Day weekend.

Regal Entertainment and NII Holdings 1Q07 Earnings Previews

Regal Entertainment (RGC) and NII Holdings (NIHD) report before the open on Thursday. I'll be visiting with clients out of town most of Wednesday and Thursday so I won’t be able to get any comments on the results until Friday. The following brief previews should help you put the numbers in perspective....

RGC is expected to report EPS of 9 cents on revenues of $598 million. Adjusted EBITDA is expected to be near $109 million. Comparisons against a year ago are not apple-to-apples due to the IPO of National Cinemedia (NCMI) which will reduce the contribution RGC receives from the leading in-theatre advertising company. Nevertheless, it should be a strong quarter for the core theatre operations as the domestic box office rose 7% during RGC's quarter. RGC has about 1% fewer screens this year so look for admissions and concessions revenue to rise 5-6%. EBITDA margins should expand slightly. I think RGC shares have another $2-3 in upside over the next few months as the summer box office gets off to an anticipated strong start. RGC remains an excellent total return vehicle with the $1.20 annual dividend equating to a 5.7% yield on top of improving fundamentals as the box office slump appears to be over.

NIHD is expected to report EPS of 48 cents on revenues of $699 million. Service revenue is expected to rise 35-40% with Brazil, Mexico, Argentina, and Peru all growing at least 35%. EBITDA is expected to grow 25-30% as NIHD is still feeling some margin pressure from the expansion of its network in Mexico. The margin pressure is expected to reverse in 2H07 as the build out is finished. Net subscriber additions should be around 280,000, up more than 40% vs. 2006, lead by close to 50% gains in Mexico and Brazil. Churn is expected to remain low and comparable to a year ago at 1.6%. ARPU should remain stable $58. NIHD remains very well positioned for high growth as it continues to gain subscribers rapidly throughout its service territory. With margin expansion expected in 2H07 and 2008, the shares should be able to hold their historic multiple which would drive the stock to $90-100. I think that move will occur once investors are comfortable with the margin expansion. 1Q07 results should be helpful in that regard.

National Cinemedia: Initial Research Observations

The underwriters of the National Cinemedia (NCMI) IPO launched coverage this week. NCMI is the largest company in the rapidly growing cinema advertising industry and is 22% owned by Regal Entertainment (RGC). RGC is widely held throughout the Northlake client base.

In general, analysts are looking for modest additional upside in this well received IPO. The story is that cinema advertising has lots of room to grow because inventory sellouts can rise and CPMs are too low. Furthermore, an argument can be made that cinema advertising has room to take share of the advertising pie. In the UK this medium represents 1.4% of all advertising expenditures vs. just 0.2% in the US. Given studies showing that cinema advertising has very high recall rates and the fact that younger consumers make up the largest groups of ticket buyers, it seems plausible that cinema advertising will be one of the fastest growth areas of ad budgets.

NCMI further benefits as it gains access to more theatres....

NCMI and cinema advertising are being compared favorably to outdoor advertising as there is no way to avoid either. And like outdoor advertising stocks, NCMI is trading at a lofty multiple. Therefore, unfortunately I have to conclude that the favorable fundamental story, with which I agree, is already reflected in the shares which trade at an upper teens multiple of EBITDA. Cinema advertising deserves a premium but that is too rich for my blood.

One set of data from the Merrill Lynch initiation particularly caught my eye. People aged 12-17 buy 18% of all movie tickets but represent 8.8% of the US population and people aged 18-24 buy 19.5% of all movie tickets and represent 10% of the population. No wonder advertisers are anxious to increase their use of cinema advertising. These are some of the most valued demographic segments and are typically tough to reach. Sitting in a theatre, the advertisers has these potential consumers all to themselves.

As an aside, if you ever wondered why some movies that are critically panned perform very well, your answer is right here – almost 40% of movie tickets are sold to young adults. I'm not saying these folks don't have good taste, just that the entertainment experience they are seeking is probably far different than that of movie critics and most baby boomers.

Regal Declares $2 Per Share Special Dividend

Regal Entertainment (RGC) announced that it would be using a portion of the proceeds it received from the IPO of National Cinemedia (NCMI) to pay a special dividend of $2.00 to RGC shareholders. This action continues a pattern of special dividends paid by RGC which along with an annual dividend of $1.20 and modest appreciation have allowed RGC shareholders to earn a compound annual total return of 15% on their shares since the company came public in 2004.

I think the newly announced special dividend will kick off another year of 15% total returns and strongly recommend investors be long RGC. The shares are especially valuable in the current uncertain market environment as the rally in the bond market has made the 6% current yield from the annual dividend even more valuable. Yesterday on Real Money, Jim Cramer was talking about stepping up to stocks with a 4% current yield. I emailed him all of my writing on RGC and told him he could find 6% here!

Most people write off RGC because they believe the movie theatre is dying a slow death due to alternative forms of digital entertainment. I believe those concerns are over hyped and point to last year's rebound in the box office to a gain of over 3% as evidence. However, even if you believe theatres are dying, you can’t overlook the fact that they are cash cows with high free cash flows.....

This sort of financial profile can be profitable for investors if management adopts the right capital structure and returns cash to shareholders. Under the leadership of its largest shareholder, the Anschutz Corporation, RGC has adopted this exact approach shareholders are being rewarded even as EBITDA barely grows over multiyear periods.

Over the last several years, RGC shares have traded at 8-9 times EBITDA. If those levels are sustained this year, the total return potential is between 9% and 25%. I believe that most of this return will occur between now and mid-May as investors are likely to bid up RGC shares as we approach what is shaping up to be the best month in the history of the theatre business when the third films in the Shrek, Spiderman, and Pirates of the Caribbean franchises are released. These films and decent 1Q07 box office will show investors that overall box office is likely to rise again in 2007 despite the doomsday scenarios. This is good for theatre industry valuations. Even better for RGC, analyst estimates and company guidance for 2007 are conservative indicating just 1-2% EBITDA growth. Put it all together and I think my target valuation for year end 2007 is realistic as is the hopes for an acceleration of a good chunk of the return to the next three months.

On the basis of this analysis and a pullback in RGC shares with the stock market decline, I added more RGC shares to accounts where the position size was too small. This only covered about 1/3rd of the Northlake accounts as most clients already had a full position in RGC.

Regal Enterainment: Post National Cinemedia Update Looks Good

Regal Entertainment (RGC) completed an SEC filing detailing the impact of the IPO of National Cinemedia (NCMI). The filing supports my bullish view of RGC which I believe offers a 15-20% total return opportunity over the balance of 2007. I expect to earn most of this return between now and the end of May as investors look ahead to the great lineup of blockbuster films this summer starting with the third films in the Spiderman, Pirates of the Caribbean, and Shrek franchises. Risk-reward is especially favorable for RGC as downside is supported by the $1.20 annual dividend which equates to a 5.5% current yield.

Northlake's initial purchases of RGC were made about 11 months ago and have produced a total return of 13%. This is slightly under the 20% total return CAGR for RGC shares since they came public in 2002. I expect a return to the historical return profile to occur in 2007 as investors realize the poor box office performance in 2005 was cyclical, not secular.

In its filing, RGC stated that it will receive $445 million in after-tax proceeds as a result of the NCMI IPO. This works out to a little under $3 per share. Twice in the past, RGC has paid large special dividends to shareholders and I expect that to occur again....

On its 4Q06 conference call, RGC indicated that a decision would be made soon on how to use the NCMI proceeds. A special dividend, debt reduction, and acquisitions were each mentioned but based on comments about management's comfort level with the pre-NCMI financial profile, I think odds heavily favor a special dividend of at least $2 per share.

The filing also outlined the ongoing impact of NCMI on RGC's financial performance. NCMI will contribute about $37 million of EBITDA to RGC in 2007 composed of (1) attendance and screen based payments by NCMI to RGC for the right to show advertising in RGC theatres, and (2) an equity pickup due to RGC's continuing 22.6% interest in NCMI.

The change in ownership of NCMI makes 2007 comparisons for RGC tricky. In 2006, RGC earned EBITDA of $535 million of which NCMI contributed $70 million. RGC owned 40-50% of NCMI during 2006 and the accounting treatment was different.

In 2007, based on 1.5% attendance growth, a 3% increase in ticket prices, and an increase in film rental costs due to more blockbusters, I think RGC will produce EBITDA of about $525 million. This is in line with $520-540 million guidance discussed on the conference call.

Backing out the NCMI contribution from 2006 and 2007, leaves theatre level EBITDA at $487 million in 2007, up 5% vs. 2006. This is the relevant growth comparison in my opinion. I believe my assumptions for 2007 may prove conservative. At a minimum, I think that in late April and early May, investors will be anticipating stronger financial performance due to the film slate which will lead to a pop in the shares.

Turning to valuation, RGC is currently trading at 8.6 times 2007 estimated EBITDA including the cash proceeds of the NCMI IPO and the ongoing NCMI EBITDA contribution. Given where other media stocks trade and the fact that RGC does not control the product that its business is based upon, I think this multiple is about right.

However, this valuation understates the NCMI impact on RGC's share price. NCMI is trading around 16 times EBITDA on its own, almost twice the level of the NCMI contribution embedded in RGC. If the NCMI EBITDA contribution were valued at 16 times EBITDA, an additional $318 million, or $2 of value, would accrue to RGC shares.

Another way to look at it is RGC's ongoing 22.6% interest in NCMI is valued at $621 million based on yesterday's NCMI closing price yet just $318 million of value is embedded in RGC's price from the NCMI EBITDA contribution.

Since my analysis of RGC's value calling for a 15-20% total return EXCLUDES the hidden value of the NCMI ownership, I feel even more strongly about staying long RGC at current prices.

Year To Date Box Office Update: So Far So Good For Regal

Following several sluggish weeks, the box office found some traction this weekend as several new releases exceeded expectations leading to an 18% gain vs. the holiday weekend a year ago. Based on a January 1st start to the year, the box office is presently down 1.5% vs. 2006. Regal Entertainment (RGC) started their quarter on 12/29/06. On this basis, year to date, the box office is up about 1% this year. The rest of the first quarter has easy comparisons as each week of 2006 was down vs. 2005. The release schedule also looks decent.

The current consensus revenue estimate for RGC for 1Q07 shows a decline of just under 1%. This is looking conservative as is RGC's 2007 guidance calling for a 1-2% gain in revenue and EBITDA for all of 2007. RGC's have pulled backed about 6% since the company reported 4Q06 results. With a good 1Q coming together and the excitement likely to occur surrounding May's big releases of Spiderman, Pirates of Caribbean, and Shrek, I think a good trading opportunity exists. Additionally, an announcement of how RGC will use its share of the proceeds of from the National Cinemedia (NCMI) should come in the next few months. Past history suggests a sizable special dividend. Look for RGC shares to rally to a new high in May at which point I will likely exit this position. Keep in mind that RGC pays a 30 cent quarterly dividend equating to a 5.5% current yield, so you get paid to wait and have some downside protection....

Lots of studios have something to cheer about from the big holiday weekend. Sony (SNE) had the big winner as Ghost Rider smashed expectations with $51 million over the four day weekend. The film tracked ahead of prior B-level comic book characters turned into movies. Disney (DIS) also should be pleased with the $29 million from Bridge to Terabithia. The film is tracking ahead of last year's surprise hit Eight Below which means it could be headed for $90 million in domestic gross. I have not seen an estimate of production costs but with the DIS marketing and merchandising machine behind it, this film should prove very profitable. The next big release from DIS is at the start of next quarter when Meet The Robinsons, an animated film based on a very popular children's book hits theatres.

The Paramount division of Viacom (VIA) has a winner in Eddie Murphy's latest comedy, Norbit. The film looks like it could get to $100 million. Critics hated it but word of mouth has been decent. There is actually some discussion on movie blogs that it could hurt Murphy's chance to bring home the Best Supporting Actor Oscar on Sunday, for which he is favored to win.

Finally, the latest film from the Tyler Perry stable is performing OK for Lionsgate (LGF). With $20 million since it's Valentine's Day release, Daddy's Little Girls is performing as expected. Perry does not appear in the film so even though the result trails the two previous Madea films, LGF long should not be concerned. Perry seems like a sure thing for LGF and he clearly has an audience that will show up on opening weekend.

Regal Entertainment 4Q06 Preview

Box office comparisons should ease this coming weekend with the fourth installment in the very popular Hannibal Lecter series but the big news this week for Regal Entertainment (RGC) will be the company's 4Q06 earnings report and the likely IPO of its 41% owned joint venture, National Cinemedia (NCMI).

Year to date the box office is down almost 7% against a fairly strong start to 2006. Hannibal Rising, due in theatres this coming weekend, could provide a boost as the first three films in the series averaged $130 million in domestic box office. Eddie Murphy also has his new comedy Norbitin theatres this weekend. Last year the top two movies were around $20 million so the comparison is favorable.

More important to RGC is 4Q06 earnings report due pre-open on Thursday....

With 4Q06 total box office down a little less than 1% and RGC operating 1.5% fewer screens, the top line could be down modestly. Additionally, RGC's quarter ended on December 28th this year vs. December 29th a year ago. The quarter has the same number of days so for 4Q RGC is trading a high volume day of holiday ticket sales for a low volume day at the end of September. According to RGC's Investor Relations department this will cost RGC about 500,000 tickets which works out to around $3 million based on average ticket prices. The consensus revenue estimate is $654 million vs. $668 million a year ago so analysts seem to be on the right track.

Expenses should be tightly controlled so EBITDA should closely track the percentage change in the top line. The consensus EPS estimate calls for 19 cents vs. 23 cents a year ago.

On the call, management is sure to get questions about what it will do with its share the NCMI IPO proceeds as well as it plans for its ongoing share ownership in the newly public entity. As outlined in this post, RGC could receive cash proceeds of almost $4 per share as a results of the IPO with an additional $3 per share in ongoing ownership of NCMI. In the past, RGC has paid large one-time dividends with excess balance sheet cash.

RGC shares have performed very well this year despite the poor start to the box office and the well-known tough comp in 4Q. Consequently, I think expectations about NCMI are high. This might create bad setup if management is unclear on use of proceeds or if the NCMI deal is poorly received. For what it is worth, my best contact thinks the deal is in good shape.

Downside is limited though with 5.3% current yield and the May box office bonanza of Pirates of the Caribbean, Shrek, and Spiderman looming. Therefore, I plan to rise out any downside hoping to get the high end of my long-standing $23-24 target this spring. If I am pleasantly surprised by this week's news, I'll either raise my target or start to scale back my position.

National Cinemedia IPO Ready To Go: Should Be Good For Regal

One of the reasons that Regal Entertainment (RGC) shares have risen 10% since mid-December and consistently been on the 52 week high list is the pending IPO of its 41% owned joint venture, National Cinemedia (NCMI). NCMI completed a filing last week indicating that the IPO is imminent.

I think NCMI is an attractive investment if priced within the IPO range of $18-20. NCMI is the largest in-theatre advertising company in the world with affiliation agreements with its joint venture partners, RGC, AMC Entertainment, Loews Cineplex, and Cinemark. These four companies dominate the U.S. theatre business with about 40% of the total theatre locations and screens. For valuation purposes analysts are comparing NCMI to internet advertising and outdoor advertising stocks given the similar revenue growth and operating margin profile.

NCMI will have about 94 million shares outstanding plus $735 million in debt for a total enterprise value of $2.5 billion. Assuming 2007 EBITDA of $185 million, the EBITDA multiple is 13.6 times, in line with or slightly below the peer group.

More importantly from my perspective as an RGC long is the impact on RGC's valuation.....

According to the NCMI prospectus, NCMI will pay its current owners $686 million for "agreeing to modify payment obligations under existing service agreements." Current owners are also entitled to the IPO proceeds, estimated at about $700 million.

RGC currently owns 41% of NCMI. This means that RGC will receive $577 million in cash proceeds upon completion of the NCMI IPO ($281 million of the service agreement payment and $296 million of the IPO proceeds). This works out to $3.84 per share. If past precedent holds, RGC is likely to payout most of these proceeds directly to its own shareholders in a special one-time dividend.

RGC will also continue to own 24% of NCMI after the deal. Assuming the shares trade at the IPO price, this represents additional value of $428 million, or $2.85 per RGC share. Over time I would expect these shares to be liquidated, setting up the potential for further special dividends to RGC shareholders.

Deducting the NCMI value from RGC's current valuation leaves RGC shares trading a little under 8 times 2007 estimated EBITDA. I think that is about the right public valuation for RGC shares although if RGC's controlling shareholder, the Anschultz Entertainment Group, ever decided to sell, private equity would pay a premium. I would not predict a privatization of RGC but given the current thirst of private equity groups for acquisitions, the steady cash production of movie theatres, and prior successful LBO experience with theatre companies, it is not out of the realm of possibility.

At 8 times 2007 EBITDA adjusted for the NCMI IPO, RGC shares would trade at approximately $23.50, in line with my long standing target of $23-24. I think the recent momentum in RGC shares will be sustained as the NCMI IPO is completed later this quarter and as investors look forward to a record breaking box office in May when the third installments of Pirates of the Caribbean, Shrek, and Spiderman hit theatres. These are three of the most popular franchises of all-time and investors might see RGC shares as a way to play their openings. If so, RGC shares might temporarily trade to 9 times EBITDA, or $26.70 per share. Given a revised target of $23.50 to $26.70 and the support provided by the 5.4% current yield, I plan to hold RGC shares for a few more months.

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.

Good Quarter For Regal Offset By Share Issuance

Regal Entertainment (RGC) reported better-than-expected third-quarter 2006 earnings. Revenue of $675 million rose 7.5% ahead of the consensus estimate of $650 million. Good performance on expenses allowed the incremental revenue to flow through the income statement as adjusted earnings before interest, tax, debt and amortization rose 14%. EPS came in at 20 cents, ahead of the 18-cent consensus.

These results normally would have pushed the shares higher, but simultaneously with the earnings release, the company announced that one of the private equity firms that is a significant shareholder is going to force a secondary of 7.7 million shares. RGC has about 150 million shares outstanding. According to Lehman Brothers, the firm, Oak Tree Capital Management, has been a regular size seller in the open market about twice per year. While a sizable secondary by an insider is never good news, the offset could be less supply in the year ahead.

Despite the better-than-expected results, due to the secondary, RGC's share price initially slid about 2%. I think it is a positive sign that by late afternoon the shares had fought back and ticked higher on day. Looking at the internals on the quarter it is easy to understand why buyers showed up....

Despite conventional wisdom that movies are in secular decline, RGC's better-than-expected revenue was driven by 5.4% growth in attendance. Ticket prices rose just 2.6% in the quarter. The attendance growth is proof that if the product is good, ticket buyers will show up. The movie-going experience is still unique and a good value relative to many other entertainment options -- in and out of the home.

Also impressive is the fact that RGC experienced increased attendance on a 2.3% decline in the number of theatres it operates and a 5.1% drop in the number of screens. RGC's closely smaller, less profitable locations improve overall corporate financial performance and the supply-demand balance in individual locales.

I have decided to hang onto RGC for another six months. Northlake's original investment was made in the spring with the expectation that summer box office strength would drive the shares to $23-$24, allowing clients to book a 15%-20% gain and bank a couple of 30-cent quarterly dividends. A secondary catalyst was the potential IPO of National Cinemedia (NCM), a rapidly growing theatre advertising firm in which RGC has a 41% stake.

The best the stock has done is reach slightly over $21, but now the company has reported a good quarter and the NCM IPO has been filed. There is a high likelihood that RGC will pass through its share of the NCM proceeds in the form of a special dividend that could be several dollars per share. Additionally, October box office strength has partially insulated the company against tough comparisons this holiday season. (The current fourth-quarter consensus calls for a 1% revenue decline.)

Looking ahead to 2007, first-half comps are not challenging, and next May will be biggest month ever for the movie business, when the third installment of blockbuster franchises Shrek, Spiderman and Pirates of the Caribbean hit theatres.

Awaiting these positive catalysts, investors earn a healthy 6% current yield providing downside support until the secondary gets priced. If all goes according to plan, the $23-24 target is still in play along with the positve impact of the NCM IPO.

Fourth Quarter Box Office Off To A Good Start

The weekend box office for the top twelve movies was up 26% vs. last year according to BoxOfficeMojo.com. That makes it four for four so far in October, with the total box office running about 13% ahead of 2005 for the month. The Prestige, from Disney (DIS), led the way with a better than expected $14 million. Strong performance was also seen by The Departed, from the Warner Brothers studio owned by Time Warner (TWX). The Departed fell just 28% and continues to show great legs. Oscar prognosticators feel both of this weekend’s top films will get nominations for Best Picture. Expected to be on top but coming in 3rd with a disappointing $10 million was Flags of Our Fathers from the Dreamworks via the Paramount division of Viacom (VIA). Mixed reviews, lack of start power and possibly war fatigue might have contributed to the soft opening. Before it ever opened, Flags was considered a leading contender for Best Picture due to early buzz and the fact that it comes from Clint Eastwood. Now, many observers feel it might not even get nominated.

The strong start to the box office this quarter is crucial for theater owners as comparisons get really tough starting at Thanksgiving....

While there is a lot of enthusiasm for the depth of this year’s holiday’s slate, industry experts don’t expect any of this year’s releases to exceed $200 million in domestic box office. Last year, there were three such films including the latest Harry Potter release, King Kong, and The Chronicles of Narnia: the Lion, the Witch, and the Wardrobe.

So far, 4Q06 is tracking close to 2004 and 2005 when the pre-Thanksgiving period produced 46-48% of the total quarterly box office. By comparison, last year saw pre-Thanksgiving account for just 42% of the box office. This coming weekend represents a tough comparison due to the huge opening last year for Saw II from Lionsgate (LGF) – Saw III is due in theatres next weekend. After that comparisons ease again until Thanksgiving when the Potter film was released last year.

For this holiday season look for the animated feature Happy Feet and the next James Bond film Casino Royale, which both open the weekend prior to Thanksgiving, to be the leading contenders for box office honors. Eragon, based on the very successful fantasy book series, should also be very popular although it doesn’t open until mid-December.

While analysts are beginning to look ahead to next May’s certain blockbusters of sequels to Spiderman, Pirates of the Caribbean, and Shrek, it is important for the recent box strength to be sustained until Thanksgiving. If that occurs, the overall quarter will be acceptable even if the post-Thanksgiving comparisons are poor.

If the next few weekends are decent, I think investors will look beyond the tough final six weeks of the year. I expect this to occur and consequently, I am sticking with my long position in Regal Entertainment (RGC). In fact, I used the pullback last week following the spike on the announcement of the IPO of its 41% owned joint venture, National Cinemedia, to add to positions for existing and new clients.

For those with a stronger stomach looking to trade in their own accounts, I’d recommend looking at Carmike Cinemas (CKEC). CKEC has met its long overdue SEC filing requirements and is now likely to attract a wider investor base. Additionally, the family oriented fare usually popular at the holidays and next May’s sequels are typically the type of films that perform well in the small and mid-size cities where CKEC maintains their circuit.

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.

Weekend Box Office Good For Regal

I didn’t get a chance to do a formal review of 2Q06 earnings from Regal Entertainment (RGC) due to my PC crash. The shares had a well deserved sell-off following slightly disappointing earnings despite a strong fundamental backdrop formed by 8% growth in the domestic box office during the third quarter.

Fortunately, this past weekend’s box office should help refocus investors from lingering concerns about RGC’s earnings to the continued strong recovery in the domestic box office. Led by Talladega Nights: The Legend of Ricky Bobby (TN), the weekend was up 18% vs. a year ago, leaving the current quarter more than 13% ahead of last year. If the rest of the quarter is just even with 2005, the 3Q box office will rise 8%, which is ahead of the assumptions used to build RGC’s 3Q estimates. Flat box office the rest of the quarter seems like a good bet given that next week should see another big gain as weekend two of TN and the opening weekend of World Trade Center will both likely beat last year’s # 1 film, Four Brothers. Comparisons do toughen, especially in late September, but there is a good chance RGC will see rising estimates within the next 90 days which should allow the share to recover all of last week’s losses. If that is the case, RGC will be back on track as a successful trade since by the end of September, investors will have collected two 30 cent dividends since I first got long in late April....

In other box office news, the weekend results confirm another problem for the Warner Brothers division of Time Warner as The Ant Bully fell 54% from its very disappointing opening weekend and Lady In The Water fell a disastrous 62% from its similarly disappointing opening weekend. Both films seem set to produce sizable losses on their theatrical runs. These results follow earlier box office and profit disappointments for Poseidon and Superman Returns. The fact that wrte-offs remain possible at Warner Brothers is less of an issue that the fact the company is looking at a very weak lineup for the home video window over the upcoming Christmas season. Home video is where the profits lie in and TWX is already witnessing a marked slowdown in its home video profits.

Lionsgate (LGF) investors will be disappointed with the $9 million opening for the company’s latest horror film The Descent. Given low production costs and the enduring strength of the horror genre on home video, LGF probably is not looking at a write-off but the studio has been without a hit since January’s release of Hostel. The Descent opened at less than half the take of Hostel.

Pirates of the Caribbean: Dead Man’s Chest was down to #3 this weekend but is showing good legs with weekly declines in the 40-45% range. The film remains on track to comfortably exceed $400 million in domestic box office and $900 million in worldwide receipts. This is good news for Disney (DIS), which reports Wednesday morning. DIS has the top two films of the summer in Pirates and Cars. Cars will end up with over $240 million domestic despite a weaker than expected opening weekend. These two films won’t contribute to DIS profits until the December quarter when both will hit the home video window. In fact, investors should beware of a timing mismatch in the June quarter when marketing costs for both Cars and Pirates will hit the income statement against just 21 days of box office time for Cars. I still expect DIS to report strong earnings and point to a healthy September quarter and sustained double digit growth in FY07 on its conference call.

Regal Entertainment Earnings Preview

Ahead of Monday's earnings report, shares of Regal Entertainment (RGC) are within 1% of their 2006 high and up almost 9% so far this year. Given the $1.20 annual dividend, the total return is even better. Coming off the dismal 2005 box office performance, RGC shares have responded to renewed growth in attendance and revenue in 2006 and to the growing likelihood of a liquidity event for its 49.9% owned joint venture, National Cinemedia. I think 2Q earnings and commentary about 3Q trends will move the shares even higher and stand by my target of $23-24.

RGC is expected to report EPS of 27 cents, revenues of $685 million, and EBITDA of $154 million for 2Q06. I think there is modest upside to the numbers because the implied revenue growth is 6% while the box office rose 8% in the quarter according to BoxOfficeMojo.com....

As the largest theatre owner in the US, RGC's revenue trends generally track overall industry growth closely. Additional upside could come from the fact that RGC is operating 1% more screens this year. Also, per capita spending on concession could be up slightly.

If I am correct that revenues will come in above some analyst estimates, there could be upside from operating leverage. Expense growth is only expected in the mid-single digits and concessions have an 85% margin, so even a small positive surprise on the top line could flow through down the income statement.

I also think that commentary related to 3Q06 could be favorable relative to current consensus estimates that call for just 3% revenue growth. Thanks almost entirely to Pirates of the Caribbean: Dead Man's Chest, quarter to date box office is up 15%. Comparisons stiffen slightly over for August and September but if the rest of the quarter is just flat with a year ago, 3Q box office would rise 6%.

Beyond theatre level fundamentals, investors will also be hoping to hear about possible plans for an IPO of National Cinemedia. Analysts believe this event could lead to a substantial special dividend of several dollars per share based on RGC's past practice. I think 2006 IPO is partially built in to RGC shares so commentary on this subject could impact the stock price as much as box office related trends.

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.

Taking A Look At Regal's Ownership of National Cinemedia

Regal Entertainment (RGC) was one of the only green stocks on my monitor yesterday and has held up extremely well against the losuy market envrionment over the past few months. Yesterday,the stock benefited from an upgrade by Bear Stearns, even if the upgrade was only from sell to neutral. Previously, a firming box office and a recommendation from Lehman Brothers boosted the shares.

Interestingly, the rationale behind the Bear Stearns upgrade was not due to recent box office strength. Rather, the analyst believes that a liquidity event for RGC's joint venture company, National Cinemedia (NCM), could be in the near future. NCM is a privately held joint venture between RGC, Cinemark, and AMC Theatres. The company provides in theatre advertising on 11,000 screens controlled by its owners. Revenue is derived from the sale of the advertising you see before the trailers begin along with ads on flat screen monitors in theatre lobbies, on lobby signage, and on concession packaging. Most of the revenue is generated by the presentation shown on screen before the trailers that includes local and national advertising. Bear Stearns estimates that NCM will produce about $250 million in revenue and $150 million in EBITDA in 2006.

Investors in RGC have been excited about NCM for sometime. The company is growing rapidly and comparables like Lamar Advertising trade at hefty EBITDA multiples. Recently, NCM announced that it brought aboard a seasoned theatre industry veteran as CEO in conjunction with hiring JP Morgan to come up with a capital plan to raise the billions necessary to upgrade the nation's movie theatres to digital cinema projectors. Studios spend hundreds of million annually to create and ship prints of films to theatres. Digital cinema would eliminate this expense and improve picture quality and the consumer experience. The studios and theatres have been hung up over how to pay for the transition. NCM appears to be angling to raise capital to fund it and charge a virtual print fee to the studios to recoup the investment and earn a return.

I have no opinion on whether it makes sense for NCM to be the financing vehicle for the digital transition. However, when I first saw the press releases about it a few weeks ago, my immediate thought was that this would be the event that triggered an IPO of NCM. And for RGC that is good news.

RGC owns 49.9% of NCM. Based on a 14.5 EBITDA multiple for the IPO, Bear Stearns calculates that RGC would receive $600 million in proceeds. That would be enough to pay RGC shareholders a special dividend of $4 per share or repurchase 17% of the outstanding shares at a 10% premium to the current stock price. RGC has a history of paying significant special dividends.

Additionally, isolating the value of NCM from RGC's income statement would reveal that RGC shares are trading closer to 7 times EBITDA from the exhibition business. I think the stock probably reflects some of the NCM value already but this would still be an incremental positive for RGC shares.

RGC shares have performed relatively well as the market has pulled back.....

Despite a late April purchase, most clients have a total return of several percent on the position. As mentioned previously, the stock has benefited from better box office numbers and its addition to Lehman's 10 Uncommon values list. An NCM IPO later this year provides another catalyst. And if I am right that summer box office strength takes a little of the home theatre/download/short DVD window/alternative entertainment pressure off theatre industry valuations, then investors might actually look ahead to next May which will be probably the biggest month in box office history as it will feature the openings of Spiderman 3, Shrek 3, and Pirates 3. Shrek and Spiderman are presently the # 3 and #6 grossing movies of all time. Pirates 1 is #21 and Pirates 2 looks like it is headed into the top 10.

Put it all together and RGC remains a good long. It should have good earnings the next couple of quarters, pays a current yield of over 6%, has an event driven catalyst in the NCM IPO, and could get a valuation lift as the gloom over the box office moves toward a more realistic, less bearish view.

Prada, Not Superman, Keeps The Box Office Growing

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.

Another Up Weekend For The Movies

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%.

Box Office Continues To Strengthen

The box office was up for fifth consecutive weekend, led by a solid second weekend for Cars and respectable openings for three new films: Nacho Libre, Fast and Furious Tokyo Nights, and The Lake House. The Break-Up and earlier releases like X-Men and The Da Vinci Code continue to pull in moviegoers. Although the summer season is still without a major breakout hit, good depth of movies appealing to all demographics is proving that decent product will bring people into theatres. Don't read too much into my "lack of hits" comments, as two films have already grossed $200 million plus, two more have grossed $130 million plus and Cars is on track for around $200 million....

The summer comparison should improve over the next several weeks starting with the late June release of Superman Returns and followed by the July release of Pirates of the Caribbean: Dead Man's Chest. Summer movie strength should continue to provide a catalyst for Disney (DIS) and Regal Entertainment (RGC). I remain long both stocks and think each has 10% upside over the next few months.

Positive Estimate Revisions Are Likely For Regal

With just two full weeks left in the second quarter, the box office is up over 10% this quarter compared to the poor showing in 2005. I continue to see this as a greater revenue increase than currently assumed in analyst models for RGC. There are other variables besides box office including concessions and operating cost such as film splits and utilities but I think things are still shaping up for a strong quarter from RGC, which could lead to rising estimates that will get the stock price moving.

Investor Expectations Are Low

Year-to-date, the box office is up about 5%. Given ticket price inflation, this implies flat to barely higher ticket sales. Nevertheless, given the despair and negativity surrounding the box office coming off weak 2005 attendance, this is a good performance. It is probably not enough to lift the implied multiples for movie related revenues and EBITDA, but it should be enough to halt the multiple compression and allow stock prices to expand driven by growth in 2006.

Paramount Gets a Lift

Nacho Libre was released by the Paramount division of Viacom (VIA/B). Paramount has struggled recently so the solid opening is good news for VIA/B. The film had low costs, estimated at $35 to 40 million. With its gross likely headed for $70 million plus, this film will be nicely profitable as it moves through its windows.

Stiff Competition for Cars

Cars has been building its box office steadily as more kids are out of school. The film did well this weekend, falling 48% from it opening. Nacho Libre was targeted at young boys so Cars look pretty good to me. The competition still makes it hard for me to gauge where Cars will end up. It is pacing is behind prior Pixar films that came in around $250 million but most of those films were released in November. I expect Cars may finish around $200 million -- a great results by all standards but Pixar's. DIS shares bounced back strongly last week off a downgrade and the slightly disappointing Cars opening. News late in the week that ABC had wrapped up a decent upfront probably helped. The Pirates opening on July 7 is the next big news for DIS. Given that it is the most highly anticipated film of the summer, I think the stock will move up ahead of the opening.

Cars Not Quite As Good As Expected; Overall Box Office Up Again

Cars opened at the low end of expectations with $63 million failing to provide a catalyst I had been counting on for Disney (DIS). I think the opening will hurt sentiment for DIS stock because it will make it easy for naysayers to get traction with the "they overpaid for Pixar" theme. However, DIS shares fell sharply late last week as expectations for Cars starting to come in so I don’t think there is a lot of downside left relative to the market unless the film drops much more quickly than expected at next weekend's box office or weekday grosses with kids now out of school are weak.

I am staying long DIS for Northlake clients because I think fundamental momentum is excellent with ABC, ESPN, the TV stations, the movie studio, and the theme parks all performing very well. Additionally, the shares could get another pre-opening lift ahead of the release of the summer's most anticipated movie, Pirates of the Caribbean: Dead Man's Chest , due in theatres on July 7th.

The overall box office was healthy again for the weekend, up vs. last year for the fourth straight weekend....

The top 12 films grossed 8% more than last year and all films in release were up 4%. Remember, $63 million is a huge opening and only for a Pixar film is that considered a disappointment. The weekend saw 5 films gross over $10 million with none of the leading films showing unusual declines. The top ten was filled with films appealing to all important demographic groups supporting my contention that if there is decent product the box office can still grow at its historic rate.

Year-to-date the box office is now up about 5%, with the second quarter tracking for a double digit gain. Comparisons remain easy for the next 6 to 10 weeks, so I am also sticking with my long position in Regal Entertainment (RGC). RGC went ex-dividend last week on its 30 cent quarterly payment. The shares are down about 5% before the dividend since I made the initial purchases for Northlake clients. I remain confident that a target in the $23-24 range is realistic as summer box office momentum sticks.

My Expectations for Disney's Cars

Disney (DIS) made a new 52 week high in Monday's abysmal market, likely anticipating this coming weekend’s opening of Cars. I think the Cars hype is also helping Regal Entertainment (RGC) which has performed relatively strongly the last few sessions. Northlake remains long both stocks although DIS is approaching my target for considering a sale.

I think the Cars opening will be very large, easily exceeding the $68 million for the Ice Age sequel earlier this year. One good sign for Cars is the solid legs for Over The Hedge. Although the film will not be a mega hit, its weekend-to-weekend drop-off has been modest. This shows that the market is out there for a film appealing to children. Also working in Cars favor is that young boys love to play with cars and trucks. The young boy demographic can be tough to reach. A final factor I see helping Cars is the appeal it has to the huge NASCAR fan base. NASCAR's fan base is a broad swath of middle America, one that has driven other movies like Passion of the Christ to huge numbers.

I have read a few cautious comments regarding the box office potential on some movie blogs. They are of the variety that Cars is very good but not as good as we have come to expect from Pixar.

Excluding the unusual success of Finding Nemo, the recent Pixar films each did around $250 million domestically (Toy Story 2, Monsters Inc., and The Incredibles). Incredibles and Nemo each opened at $70 million, Monsters started with $62 million, and Toy Story 2 began with $57 million.

My prediction is that Cars will pull in around $250 million for its domestic run with an opening weekend north of $80 million. The larger opening than prior Pixar films with a similar total run respects the front loading that is appearing with increasing frequency of late. Popular films are showing an increasing tendency to burn out more quickly. This is more of an issue for theatres than studios but is something to be aware when analyzing opening weekend trends.

Weekend Box Office Report: X-Men Show Their Powers

If this summer is "the last stand" for the box office bulls, the third installment of the X-Men franchise should make shorts nervous. Debuting as the 5th best four day opening, the 4th best three day opening, and the second largest Friday opening, X3 racked up $120 million over the Memorial Day weekend. Along with good business from the second weekend for The Da Vinci Code and Over The Hedge, the total weekend box office matched last year's tough comparison against the final installment of the Star Wars trilogy. With easier comparisons ahead, some strong product in theatres now, and Cars coming the weekend after next, my bull case on the summer box office remains intact.

Regal Entertainment (RGC) is my long position to play the summer box office....

So far, this quarter, the box office is up about 14%, well ahead of revenue estimates for RGC which imply a gain of no more than 6-11%. I think estimates will begin going up around the time of the June 9th Cars debut. RGC shares have dropped about 8% during the market's decline. I think they should regain prior levels and move higher through the summer.

My call on RGC is for a trade off the anticipated strong summer box office, but beyond the year-over-year comparisons, I think the huge numbers for X3 are a reminder that the theatre business is here to stay. What better marketing for the News Corp (NWS/NWSA) X-Men franchise than the huge marketing and media blitz ahead of the film and a few days worth of newspaper articles and TV stories about the opening weekend numbers.

Using the theatrical launch is the only way to build the franchise, set-up DVD sales and rentals, earn license revenues, recoup the rumored $200 million production budget, and possibly spin-off new movie franchises (this is supposed to be the last X-Men film). I just don’t see how diluting the box office by opening the film in theatres, DVDs, and broadband downloads simultaneously could generate the same buzz as a big opening weekend and a climb up the all-time box office charts.

I think this realization will dawn on investors as Cars and Pirates of the Caribbean follow X3 with huge numbers over the next six weeks. If any other films perform well, it will just be gravy. A big summer at the box office will show that the studio business still works if the product is right and the theatres are at the center of the financial model. For the next several months that should make RGC blockbuster.

Memorial Day Box Office

My friend and fellow money manager, Doug Kass, is making a good call to short Dreamworks Animation (DWA) on the back of less than stellar box office for Over The Hedge. There are no catalysts for DWA unless the film does surprisingly well this weekend. Short of buyout rumors becoming reality I see little upside and 10% downside.

Doug is also betting the over the weekend box office X-Men: The Last Stand (X3). Again, I think he is right. The opening weekend could be large. From what I gather buzz on the film is good, although early reviews aren’t nearly as favorable as they were for the first two films. The plot seems to advance the series by exploring the mutants more fully which should help keep X-Men a fresh franchise. Also helping is the fact that the last X-Men movie was released in 2003. The disappointing Mission: Impossible 3 had to overcome a six year hiatus from MI2. Finally, teens drive the box office and the fan base for X3 is teens....

X2 opened with $85 million in 3,741 theatres, according to BoxOfficeMojo.com, easily beating X1's opening. X2 opened on the first weekend in May whereas the current installment gets Memorial Day, usually a very good weekend for movies. I have to think that experts will be calling for X3 to match or exceed its predecessor. Remember Sunday is a full weekend day on Memorial Day weekend. I think $100 million for the 4 day weekend is a definite possibility.

For the overall box office, the weekend looks promising with good numbers likely from The Da Vinci Code, which performed strongly on Monday, and Over The Hedge, in addition to the big opening for X3. The comparison is fairly tough, however. Last year on Memorial Day, the final Star Wars movie did $70 million and new releases Madagascar and The Longest Yard did $61 million and $58 million, respectively. If Da Vinci and Over The Hedge drop 30% helped by the long weekend, even a $100 million opening for X3 would leave the top 3 films short of the top 3 from a year ago.

Nevertheless, I think a strong opening for X3 and decent holds for Da Vinci and Over The Hedge will leave box office observers and analysts in a good mood with the Cars opening just two weeks away, followed by Pirates of the Caribbean a month later. I know I've said this often recently but this is a good summer to be long Regal Entertainment (RGC) to play overall box office strength and Disney (DIS) to play what may turnout to be the two most popular movies of the summer.

X3 is from Fox and won’t likely move the needle for News Corp (NWS) shares.

NASCAR fans will get a mass sneak preview of Cars this week when the film is shown on a giant screen at Lowe's Motor Speedway as part of the racing circuit's Coca Cola 600 weekend. For you non-NASCAR fans, this is the equivalent of the Indy 500 weekend for NASCAR's giant fan base in its home of North Carolina. For us DIS longs, it better be good!!!

The Da Vinci Code Holds Very Well On Monday

The Da Vinci Code grossed $8.9 million Monday. That is very strong, 11th all-time for a Monday according to MovieCityNews.com, trailing only franchises like Star Wars and Lord of the Rings. I had been thinking the $77 million opening might lead to a low $200 million domestic run but based on the Monday figure, a mid $200 million run looks more likely. So much for the critics!

I have to admit I get a kick out of all the comparisons between the box office for Da Vinci and Passion of the Christ. Those who oppose The Da Vinci Code will be glad to know that in the US, Passion will win easily as it made $371 million. The rest of the world will be a win for Da Vinci, however, as Passion did just $241 million abroad, while Da Vinci made $152 million abroad in just its first weekend.

Weekend Box Office Report: The Da Vinci Code Comes Through

Despite poor reviews, The Da Vinci Code exceeded estimates with weekend ticket sales of $77 million in North American theatres. The weekend gross exceeded estimates in place prior to poor reviews out of Cannes. Along with a solid performance from Over The Hedge and reasonable business from other films in wide release, the year-over-year decline in the box office was limited to less than 3%, a good performance given that the final installment of Star Wars series was released on the same weekend in 2005. The weekend's results are receiving favorable commentary in the business press which should help investor sentiment and keep intact my thesis for a strong summer box office and gains in theatre stocks, including Northlake's long position in Regal Entertainment (RGC).

This coming weekend should see continued good business for The Da Vinci Code and Over The Hedge and a big opening for the latest X-Men film. The comparison is still tough but once Memorial Day is growth should pick up sharply as the early June opening of Cars and the July opening of Pirates of the Caribbean offer easy comparisons and hugely popular franchises. Both those films are from Disney, another long position held widely in Northlake client and personal portfolios.

Through Sunday, year-to-date, the box office is up about 5%, on a gain of 1% in ticket sales. The current quarter is running up 14%, comfortably ahead of analyst estimates for RGC's revenues which range from up 6% to up 11%. I see estimates for RGC heading higher over the next six to eight weeks, which should be a catalyst for the shares. Investors who buy now will also receive two 30 cent dividends in the next five months, more than 3% of the current stock price.

Looking more closely at the individual films and the studios that released them...

I think it is too early call The Da Vinci Code and Over The Hedge financial successes. Da Vinci did come in above expectations but the Saturday gross fell slightly from Friday which might indicate that bad reviews are impacting word of mouth. Additionally, while the film had one of the top 15 openings of all-time, the per screen average was the slightly lower than all the films above it. Even more so than normal, the second weekend will provide a better guide for ultimate box office success. I'd guess Da Vinci will head close to $200 million in US box office, a good but not great figure. International grosses look very strong, and Sony (SNE) has little to worry about from a financial perspective.

I think Dreamworks Animation (DWA) shares could be weak this morning. Over The Hedge actually came in slightly short of the $40 million many observers expected and earned less than comparable films like Chicken Little and Madagascar. The film will do well financially but it doesn’t appear to be a blow away hit and DWA lacks catalysts as this film is the entire 2006 story.

Finally, I wonder if Time Warner (TWX) may be looking at a write-off for Poseidon. The film cost $160 million to produce according to estimates and advertising must have been well north of $20 million. The film has grossed just $37 million so far in North America and a modest $4 million overseas.

Poseidon Sinks The Box Office But It Will Float

Poseidon sunk the box office as the big budget film flopped, bringing in just $20 million and opening in second place. Poor performance from Poseidon was the primary cause for an 8.4% decline in box receipts versus the same weekend a year ago. The negative comp broke a six weekend winning streak and the weak Poseidon opening along with lower than expected receipts from Mission: Impossible 3 will surely have observers worried about the box office again. I would use any weakness in shares of theatre leader Regal Entertainment (RGC) to add to positions.

The upcoming weekends is where comparisons should really pick up, especially with the June 9 opening of the next Pixar film, Cars, followed by the July opening of the sequel to Pirates of the Caribbean. This coming weekend should have two successful openings as well with The DaVinci Code and the next film from Dreamworks Animation, Over The Hedge. This coming weekend has a tough comparison against last year's release of the final installment of the Star Wars series, but Memorial Day weekend looks good when the latest X-Men movie opens.

Despite a couple of weekends of weaker than expected results, I continue to think RGC can rise to the mid $20s over the next six months, a period during which investors can collect two quarterly dividends of 30 cents each. Keep in mind that the box office comparisons are very easy against a long string of down weekends in 2005. In fact, despite this past weekend, box office receipts are still up almost 23$ this quarter against analysts estimates that assume gains of 10-12%.

Tom Cruise Falls Short But Regal Still Looks Good

Despite a weaker than expected opening for Mission: Impossible III, the weekend box office rose 24% against easy year ago comparisons. Based on the data I use from BoxOfficeMojo.com, the box office is up more than 6% so far this year. With price increases running at less than 5%, this implies that attendance is growing slightly, a welcome relief after a miserable 2005.

More importantly to Northlake's long position in Regal Entertainment (RGC), so far this quarter the box office is up a whopping 29%. Looking over a couple of analyst models, current June quarter estimates show admissions and concession revenue up just 10-12%, so rising estimates are a distinct possibility and usually that is good for the shares.

As I have noted before, box office comparisons are very easy through the end of August. Every week last year from late March through early August had a negative year-over-year comparison and it wasn't until September 2005 that a string of positive year-over-year comparisons finally appeared....

This coming weekend brings the wide release of Warner Brothers Poseidon, a remake of the 1972 release The Poseidon Adventure. Last year the #1 film on the comparable weekend was Monster-In-Law, which brought in $23 million. The comedy Kicking and Screaming opened on the same weekend last year to a respectable $20 million. I have to believe that Poseidon will bring in over $30-40 million and with week two of MI3 holding at north of $20 million, another up comparison seems easily in the cards.

I remain long RGC still expecting box office momentum to carry the shares to $23-24 before Labor Day. A 30 cent dividend in June and another September sets up the possibility of a 15% return in a little over four months.

New Purchase: Regal Entertainment

I used yesterday's early weakness in the market and in the shares of Regal Entertainment (RGC) to initiate a meaningful though not quite full position. The headline numbers looked like a slight miss with EPS of 9 cents and revenue of $585 million against expectations for 11 cents and $602 million. EBITDA hit expectations, however, at $110 million, up 8%.

EBITDA benefited from a mix that favored high margin concession sales, strong per capita concession sales, better than expected film rental costs, and a decline in other operating expenses. These factors offset a 2% decline in attendance, which was worse than the flat industry performance, and a less than expected 2% increase in ticket prices. Average ticket price was $6.76. Overall, these results are consistent with a quarter that was strong for family films where concessions are higher but average ticket prices lower.

Theatre industry investors focus on EBITDA so I wasn't that worried about the revenue and EPS miss. The press release indicated the $1.20 annual dividend is here to stay, which provides good support at a 6% current yield. Additionally, the shares have been picking up sponsorship as lots of folks are noting the big upturn in the April box office I wrote about earlier this week on Media Talk. I decided that the market would look past any hairs on the 1Q report with 2Q and 3Q shaping up very well due to a strong film slate that includes lots of family films and very easy comparisons....

Consensus EBITDA for 2006 is $545 million. Although I think it will trend higher over the next few months. Of that amount about $470 million comes from theatres with the balance from National Cinemedia. RGC owns 53% of National Cinemedia which sells in-theatre advertising and looks for other revenue enhancing opportunities.

RGC has 154 million shares outstanding so the market cap is $3.2 billion. Add debt of $2.0 billion and deduct cash of $156.6 million and total enterprise value is $5.1 billion. This puts the stock at 9.2 times EBITDA. Lots of analysts think National Cinemedia could be spun out and is worth a premium multiple. If it is worth 11 times, then the theatre EBITDA is valued at a little under 9 times EBITDA. This is about where several private equity deals have taken place for other theatre chains.

I don’t think RGC is particularly cheap but with dividend protection in place I think operating momentum and rising estimates can carry the shares higher. If the street gained confidence that EBITDA would grow again in 2007, then rolling the current EBITDA multiple forward would get the shares to $24. Free cash flow after everything including the dividend is almost $1.00 per share, so this could add further to the upside as debt paydown leaves more value for shareholders.

My current plan is to hold the shares into September. I will collect two dividend payments of 30 cents which along with $3-4 of potential upside in the shares, produces a total return of about 20%.