Add Some Entertainment to Your Portfolio With This Stock
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Looking to add some fun and entertainment into your portfolio? Maybe owning a movie theater would help. Movie-makers are betting big this year to attract the crowds, with 50% more big blockbusters coming out this summer. Twenty-two big-budget movies are scheduled to come out, in fact. The Wall Street Journal thinks that there may even be a "glut this summer" in blockbusters. Michael Lynton, chief executive of Sony Pictures Entertainment, summed the summer movie environment up by stating that:
"It's a scary summer because it's like walking through the Himalayas when I see the gigantic movies coming in."
Iron Man 3 has already experienced one of the most successful openings of all time. So, what's the best way to capitalize from a potential pick-up in movie-goers this summer?
Buy a theater?
Regal Entertainment Group (NYSE: RGC) is the nation's largest movie theater chain, operating over 500 cinemas in 38 different states. Regal has also been prepping for a pick-up in attendance, recently completing an acquisition of 43 theaters to add 513 screens. Regal really needs an increase in attendance, as revenues and earnings haven't been very pretty recently:
The company is trading at around 22 times its earnings and 16 times its forward earnings, offering investors a whopping dividend yield at about 4.70%. The problem with this attractive dividend yield, however, is that it is only attractive on the outside.
Digging deeper, we can quickly conclude that paying a $0.84 dividend out of only $0.78 earnings per share is unsustainable for the long-term. Even looking forward to future earnings estimates of $1.09 per share, the payout ratio is still high at 77%. The company's track record isn't that great, either, after the company cut its dividend by 40% in 2009.
While Regal looks risky, there are other companies that do business with theaters like Regal that will also profit from a successful summer at the box office.
An old audio king looking to adapt to the times
Building on already-established agreements to install its Atmos sound system on over 200 screens globally, Dolby Laboratories' (NYSE: DLB) most recent 20-screen deal involves Regal. Regal's chief purchasing officer, Rob Del Moro, explained that:
“We’re all familiar with the evolution of image clarity that came with digital cinema. Now, Dolby Atmos can provide greater definition and dimension to moviegoing as sound moves around the auditorium with precision placement to match the action as the filmmakers intended.”
Dolby Atmos was installed on 20 of Regal's RPX (Regal Premium Experience) big-screens right in time for the new "Superman" blockbuster, Man of Steel. Dolby has secured about 45 titles and growing for its Atmos technology since it debuted a few years ago with the film Brave, and it will be featured in more blockbusters this summer including The Wolverine and Monster's University. Atmos is being utilized internationally as well, with the largest circuit in China, Wanda Cinemaline, opting to make it the standard audio system for its "X-Land" big screens.
While Dolby doesn't pay a dividend, the company is as financially strong as can be:
Having no debt and more cash than liabilities is impressive. Perhaps even more impressive, the company sports a current ratio above 4. Before we get too excited, we must also recognize that Dolby has recently been experiencing problematic earnings and revenues as well.
Dolby needs to get in on the digital train and jump ship from its more traditional bread-and-butter businesses involving PCs and DVDs. Management seems to notice, however, making new technologies like Atmos look encouraging for the company's future earnings. Not everyone is as optimistic, however.
Is Atmos really nothing special?
In an interview with Pocket-lint, IMAX Corporation's (NYSE: IMAX) chief technical officer Brian Bonnick explained that Atmos was simply a "new mixing standard whereby through what they [Dolby] call 'objects' they can originate a source of the sound from a specific location within the theater by adding more loud speakers into the theater."
He said while it was a good thing, he also implied that it wasn't anything really special, saying that the company had "missed the boat" on its technology because "all of the equipment in the theater is still standard grade materials. The way that they've tuned the theater, which is very critical, is still following standard industry practice. So they have created for themselves a gain in one area which is great - it's a great idea - but they haven't followed through the rest of the equation."
Bonnick thinks his company has an advantage over Dolby because of its custom equipment, and also because IMAX technology provides an experience that enables "every loudspeaker to sound identical to the next loudspeaker in that room" which is key because of the way our brains pick up frequencies. He claims that IMAX, unlike Dolby's Atmos, provides "full clarity of sound."
IMAX is much more than just sound, and with the largest research and development investment in the company's history on a laser projection system, it will be moving into next generation technology. The laser projection will feature 4K resolution and be brighter while providing unprecedented clarity in picture. The new technology isn't expected to be released until mid 2014, however. IMAX is looking to retain its leadership in visual cinema technologies, and Bonnick summed up its moat nicely when he stated that:
"[T]heater has always been our core business and as a company now we recognize that we have great brand power; great brand recognition."
IMAX also has other tricks up its sleeve as well, such as the world's first integrated 3D digital camera.
While IMAX is nowhere near as strong financially as Dolby, the company also seems to have better earnings quality with better, up-trending revenues:
Also keep in mind that IMAX is trading at over 40 times earnings, as opposed to Dolby's price-to-earnings ratio of 16.
The bottom line
While Regal looks a little risky and IMAX looks a little expensive, Dolby looks attractively valued now. The company is also positioned to capitalize from a successful blockbuster-filled summer. It definitely needs to ramp up its revenues and increase earnings along with them, but with literally no debt and a promising future with digital technologies such as Atmos and Dolby Digital Plus (found in mobile devices such as Kindles and smartphones), today's troubled earnings may be just a speed bump in the long run. The company is in a transitional stage, and ingraining its Atmos technology into theaters is part of a promising start of this transition into the digital age.
Joseph Harry has no position in any stocks mentioned. The Motley Fool recommends Dolby Laboratories and 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!