Silver Screen Showdown - Making The Movies Happen
Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I went to see The Hobbit in cinemas, it was great! As a big moviegoer and an investor, I decided to take a look at the companies that make the on screen experience happen. Ignoring the massive media conglomerates that make and produce the movies we see, I decided instead to look at the folks I like to call “Experience Creators.” Those experience creators are IMAX (NYSE: IMAX), RealD (NYSE: RLD), Dolby Laboratories (NYSE: DLB) and Cinemark Holdings (NYSE: CNK).
Show Me The Movie!
It’s probably about once a week that I go check out a movie at Cinemark. The chain offers a great cinematic experience across the United States, and even operates a successful chain in Latin America. If you believe in a recovering economy, if you believe that 3D will eventually bring more people into the cinemas, and if you believe that the big screen can never be beaten by home theaters, then you’ll want to take a look at Cinemark as an investment.
Cinemark has had continuous sales growth over the last decade, even when the recession hit. Sometimes they have hit rough patches and posted no profit, and other times they have completely shocked analysts with massive profit.
In terms of competition, Cinemark will have to watch out for AMC. AMC is a private movie chain that was bought out by Chinese multinational conglomerate Dalian Wanda Group in May. With a large amount of cash backing AMC it is likely that they will continue to expand their business around the world.
I think that Cinemark will continue to grow as the economy comes back to life, and more people are willing to buy the popcorn on their movie trips. The company is trading with a forward P/E of just under 14. They also offer a nice dividend yield of 3.25%, which could help sway you towards a buy.
One problem though; I don’t like debt on a balance sheet, and Cinemark has quite a lot of it. The debt-to-equity ratio currently stands at 1.58, which is a bit too much for me to stomach. If the debt wasn’t there I would buy this company right away.
Make it LOUD!
One of the things that makes the movies great is the sound. There are a few competitors in the field of mastering the sound and installing the massive speaker systems that we come to the movies to hear, including Dolby Laboratories and Sony (NYSE: SNE).
If you’d have asked me in 2011 who would win the sound game, I would have said Sony. The company was, and still is, busy converting old-style film projectors into the new and easily operable digital projectors. While doing this they were making sure that cinemas bought the full package and installed a Sony surround sound to go along with it. Sony was the best back then, but in April of 2012 Dolby came along with a game changer: Dolby Atmos.
I have not had the pleasure of hearing Dolby Atmos yet, but the system is considered one of the best commercial cinema applications of sound. Already they have managed to push this out to over 80 cinemas worldwide for The Hobbit and they will be looking to get it into even more in time for February’s A Good Day to Die Hard.
Dolby has seen growth in sales and net income over the decade. It did have a slight dip in fiscal 2012, which ended in September. Is it a cause for concern? I can’t tell. I think the company will continue to sell their technology and systems for a long time to come. They are free of any long-term debt, a big plus in my book, but they don’t offer a dividend, which may keep some investors away.
Building on the Experience
IMAX and RealD are in the experience game. These two companies are trying to change the way that we view movies, and they’re both doing a great job at it. Let’s take a look at RealD first.
RealD is a tricky stock for me. In fiscal 2012 they turned a profit for the first time. Is there potential for them to stick around though? I definitely think there is. To truly understand this company I think you have to know how they operate.
RealD goes out to cinemas and builds out the technology required to show 3D films, which they do out of their own pocket. They then charge the cinemas fifty cents per viewer per movie in order to recuperate their funds. If the 3D tech costs exactly $10,000 to install then only 20,000 patrons need to use the screen in order for it to pay for itself. The Hobbit was showing on over 4,000 screens in the United States alone this weekend. Most of those screens were utilizing RealD technology, and I’m willing to bet that major cities will be seeing 20,000 people per screen over the weekend. Once that happens, RealD is making pure profit.
What about IMAX, how do they do it? Kind of a similar principle. They build out entire cinema screens, either alone or with a partner, and then they collect the money. The cinema is left with staffing and cleaning costs, which means that IMAX just goes in, installs, and sits back. They’re not really sitting back though, they’re investing in new screens around the world.
IMAX is in no way tied to 3D. If RealD fails, IMAX will continue on. I like IMAX over RealD in the experience space, as I think they will continue to grow year after year.
Ash1402 has no positions in the stocks mentioned above. The Motley Fool owns shares of Imax and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Dolby Laboratories and Imax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!