Movie Madness for Q4?

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While the market continues to push the boundaries of its highs, individual stocks are doing their best to pop on to people's radars.   One stock which has enjoyed a renaissance since its March 2009 low is IMAX Corp (NYSE: IMAX).

IMAX had plummeted to the depths of $2.41 a share during the worst of the credit crisis, but managed a fifteen-fold increase in share price over the next two years.  Not surprisingly, investors took their profits at these highs, and those lucky ones who got out near the top missed the earnings "surprise" which halved the stock price.  Since the collapse the stock has quietly gone about its business, but the past week has seen a doubling in typical buying volume as the stock popped above $23.50.  The cue for the recent buying was the reported $46 million that 'The Hobbit' contributed in IMAX revenues for December. 

Revenue-wise, the company may have a history of coming in behind analyst estimates, but last quarter it bucked this trend and beat Wall Street.  It also managed to beat a quarterly downturn in general box office admission by growing 16% (globally) and 45% year-to-date.  This resulted in 20% higher Q3 revenues of $81 million over the same quarter last year.  The company further tempered this by saying the "box office potential may not have lived up to expectations" for the quarter.  However, one only has to look at 'The Hobbit' figures to see Q4 could be very strong (The Dark Knight rises grossed over $110 million for IMAX), although the company will not be an issuing an end-of-quarter box office update for Q4 due to changes to its reporting.  There are ten confirmed films for 2013, with 'Star Trek' and 'The Hunger Games' sequels likely to carry their respective quarters.   Industry experts suggest that 3D versions of films accounts for 45%-50% of a film's current total revenue.   This may be behind their estimates for 3D movie penetration, but offers IMAX both a healthy revenue stream and an opportunity to grow market share in the coming years.  

Expansion plans remain robust, both domestically with a deal inked with AMC, and internationally with 41 new theaters.  The China story is interesting, in part because the company hasn't yet managed to overcome government regulation as to when (non-Chinese) movies show, but has tempered this by looking to support the domestic film market.  Latin America is a laggard market and there was little offered in terms of strategy going forward, other than a 'building of partnerships' in 2013.  India is still a market in its infancy, but IMAX is trying a Bollywood strategy in its 4 theaters (with plans for 9 more).  So while the international market is interesting it's the domestic market where the revenue growth is coming from.

Competition for IMAX comes from the likes of Regal Entertainment (NYSE: RGC). The stock has historically struggled to sustain a move above $14, but has consistently attracted buyers when it dipped to $12. The stock is making yet another stab to clear $14, but it will likely require a push into $16-17 before one can suggest it has done enough to break away.

Regal Entertainment enjoyed a 4.5% growth year-to-date to the same period last year - a fraction of the growth enjoyed by IMAX Corp for the same period, although revenues of $8.7 bn dwarf IMAX's income.  Regal Entertainment did announce an expansion of its IMAX relationship with 10 new screens to come online over 2013/14. Within the Regal Entertainment ecosystem, movie goers show a preference for the IMAX brand over Regals Premium Experience (RPX).  However, RPX has been a solid alternative, particularly in markets where it does not have the IMAX license.

Regal Entertainment reported a decline in 3D movie revenue for Q3, but early Q4 figures suggest those Q3 losses have  been erased.  One of the aspects on 3D revenue was the presence of 2 kids movies in the top 5; sales of lower priced kid tickets will translate into lower revenue.  Concession sales rose by 4% per attendee (but dropped 5% overall), driven by an expanded menu.  One of the key factors influencing the quarter for Regal Entertainment (but not mentioned in the IMAX call) was the Aurora shooting.  

Heading into Q4, the company was optimistic that its 3D operations with 'Skyfall' ($299 million gross), 'Twilight Saga' ($290 million gross) and 'The Hobbit' ($278 million gross) would be key contributors.  If we assume half of the gross revenue is 3D sales, then Q4 could be a good one for 3D movie sales.  It could also prove to be a very good quarter for IMAX.  The company remains unclear as to the impact the Soda Ban will have on concession sales in New York, but it plans to stall by seeking an injunction on the ban.  Finally, Regal Entertainment offers a healthy 5.90% dividend yield, which makes the stock attractive to income investors.   

In the regional space, Carmike Cinemas (NASDAQ: CKEC) reported a year-to-date growth of 8.1%, which was ahead of Regal Entertainment, but behind IMAX.  Like Regal Entertainment, it has a heavy focus on concession sales, which was up 6.7% on a per attendee basis (but didn't quote overall figures).  However, because it operates in smaller markets, the ticket revenue per patron is well below that of Regal at $6.52 per attendee, versus $8.79 of its larger rival. 

Where Carmike Cinemas struggles in comparison to both Regal Entertainment and IMAX is in its high debt load.  With a Market Cap of $278 million, Carmike Cinemas carries $324 million in debt. This compares to the minimal debt of IMAX, and the $2 billion debt of Regal Entertainment to its $2.2 billion Market Cap.  The high debt load is in part driven by its recent acquisition of Rave Reviews Cinemas (a deal that will close in Q4) as the company grows its total theater coverage to 300; it currently operates 251 theaters to the 524 of Regal Entertainment.  However, the company was optimistic heading into Q4, although it was light on specifics.

Certainly, in the Bigger-is-Better space, IMAX has the branding to attract people, despite its higher ticket premiums.  The question is how much will the 3D market grow in 2013, given a general underperformance to expectations (and a knock-on impact on films which are ultimately produced in 3D).  The overall movie market looks buoyant for Q4, so solid earnings releases should help all three stocks.  A strong positive reaction to earnings would probably help Regal Entertainment most, given the historic price action, but the basis is there for all three stocks to benefit. 

fallond has no position in any stocks mentioned. The Motley Fool recommends Imax. The Motley Fool owns shares of 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!

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