Shorting Soon at a Theater Near You
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many people fantasize about being in the movie business, but in reality it's a tough gig. Particularly if you're an operator of theater chains, particularly now. As of this past Christmas, box office revenue in North America slid nearly 4% year on year to $10 billion. Considering that, is now a good time to yell "FIRE!" in a crowded theater and sell or short positions of exhibitor stocks like Regal Entertainment Group (NYSE: RGC), Cinemark Holdings (NYSE: CNK) and Carmike Cinemas (NASDAQ: CKEC)?
All recent signs point to "yes". 2010 wasn't quite the slump year 2011 turned out to be, but there was no domestic growth either. 2009 saw a healthy annual increase in domestic box office by around $1 billion (to approximately $10.6 billion)... however this followed a flat year. The real growth these days is in foreign markets, in particular successful emerging markets in regions such as South America. The numbers tell the tale: from 2006 to 2011, North American box office expanded a little over 15% while the increase abroad was almost exactly double that figure.
So studios and distributors have some room for growth supplying their product to Hollywood-hungry markets abroad. Domestically, it's a different story: audiences these days have a full menu of ways to watch movies, from the ever-expanding online offerings of Netflix, the on-demand library of their cable operator, or good old-fashioned piracy for those not inclined to pay for their entertainment. Theatrical exhibition is the preferred way for many moviegoers to enjoy a film and has stood fast against slicker rival technologies, but there's never been a more colorful palette of alternatives than today.
All of the above bodes ill for exhibitor stocks. Operating cinemas is a high-cost business, and if revenue growth isn't there the results are going to suffer. Despite its recent profitability, Regal looks vulnerable thanks in no small part to its heavy debt load (at over nine times its cash position at the end of the latest fiscal year) and rich valuation of nearly double the forward P/E of its rivals. It's got the best dividend yield of its peer group, however it's questionable if that can last given the indebtedness. Regal trades quite briskly and there are obviously believers in the company, so of the three stocks it's probably the one best positioned for a short sell.
Cinemark's numbers look a bit better, but not by all that much. Like its rival it's posted black net profit figures in recent quarters, so that's encouraging. What's not is the debt, at three times the cash position at the end of its last fiscal year. Still, the company has maintained or grown its dividend fairly consistently over the past few years, it's much cheaper than Regal on a valuation basis, and it has a revenue-per-screen metric comparable to that of its top rival. This blogger isn't a believer in the growth prospects of American theater chains; for those that feel differently, however, Cinemark is worth considering for a long buy.
The number three exhibitor stock is Carmike. It's behind its two bigger brothers, in some ways significantly. It offers no dividend, is much more highly leveraged, its revenues per screen are nearly half as much as Regal and Cinemark, and it's only recently been getting over deep losses. Forward P/E is moderately attractive at 8.8, but the weak potential of domestic box office makes even that single-digit figure seem pricey.
Most of us like to daydream about being movie stars or wealthy studio moguls. At the moment, however, it might be better to chase that dream by buying the stock of a studio such as Lions Gate (NYSE: LGF) or a broad entertainment conglomerate like Time Warner (NYSE: TWX). These days, it seems much better to be a content producer rather than the company exhibiting the merchandise.
Fool blogger Eric Volkman does not own shares in any of the companies mentioned in this entry.
