These Stocks Will Be Blockbusters This Year
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
From what I am currently seeing, the summer of 2013 looks like it will be very hot. No, I'm not talking about a heat wave--I'm talking about all the movie releases planned by the different production houses. Here's a glimpse of the schedule of two of the biggest film-producing companies in the coming months.
Some of them are sequels to blockbuster franchises, and others are new ideas that have high expectations attached to them. Whatever the case may be, I feel that these movies are capable of achieving great things at the box office. To support my expectations there is the past performance of movie production divisions of Warner and Viacom, i.e. Warner Bros. and Paramount Pictures, respectively. The past year’s box office collection of these two brands exceeded $5.1 billion. Additionally, the success of these production houses complements the performance of companies like IMAX Corporation (NYSE: IMAX). Let's dig into eachcompany and see how they are doing.
IMAX reported a decent fourth-quarter of 2012, giving a beating to the consensus estimates. It had revenue of $77.8 million and adjusted earnings of $27 million (up 17% and 29% year-over-year, respectively). With the earnings came the guidance for new theaters in 2013.
In 2013 the company expects to open around 110 new theaters. This incorporates additions from a backlog that stood at 276 at the end of 2012, some new signings in the year that should be completed in the year itself and allowance for some slippage in the scheduled openings. Additions in 2013 are expected to be back-end loaded to a considerable degree. And it is also expected that most of the new theaters will be opened via joint ventures. The additions will increase the reach of IMAX in both the local and global markets.
Of the backlog, approximately 80% will be installed internationally to increase its global footprint. Additionally, half of the signings last year occurred in Asia, and China represented one-third of the total signings. The company's inclination towards China is also evident from the fact that IMAX had 108 operating theaters and around 44% of total backlog theaters in China. IMAX sees the country as the second largest market after the US. In 2012 the overall Chinese box office contributed about $2.7 billion (up 30% year-over-year) and is continuously growing. Taming this beast should be beneficial for the company in the future.
Apart from these expansions, 2013 seems strong to me because of a long list of sequels of blockbusters like G.I. Joe, Iron Man, Star Trek, The Hunger Games, The Hobbit, 300, Hangover and The Man of Steel. These should be well received by IMAX’s core fans boys’ audience and will drive the year in terms of box office returns.
Time Warner Inc.
The struggle of the publication segment of Warner is no secret. In the last-quarter there was a decline in the division’s revenue and operating income. Both fell by 7% and 10% year-over-year, respectively. The good news is that in order to overcome this decline and improve the profitability of the company, Warner has decided to spin-off the publishing division and cut its losses. Now, the focus of the company will be on the more profitable cable television and movie production businesses.
Apart from the spin-off, 2013 looks to be a strong one considering the upcoming squeals of blockbuster franchises like The Hangover, 300, and The Hobbit. Previous editions of these franchises have made around $2.5 billion in box office collections. Additionally, there are high expectations from the high budget sci-fi movies like Pacific Rim and Superman: The Man of Steel.
As for its cable television business, under syndication deals it sold the rights of broadcasting its shows The Middle, Mike and Molly, and 2 Broke Girls. In addition to this, the broadcasting rights of its famous series The Big Bang Theory will be sold in the future. These shows have been a great success in the past and should also generate a decent cash flow in the future. For instance, Warner is charging a license fee of $1.7 million per episode of 2 Broke Girls.
With greater focus on the more profitable movie production and cable television businesses, Warner's future cash flow generation capacity seems intact.
In the first-quarter of 2013, Viacom posted total revenue that was down by around 16% year-over-year. The Media Network segment did lag, but the main drag was because of the Filmed Entertainment revenue, which slipped by about 37% year-over-year.
Moreover, fiscal 2013 wasn't a dream start for the company. A seven-year-old agreement of Paramount Pictures, a subsidiary of Viacom with DreamWorks Animation SKG Inc. ended with the end of the calendar year 2012. According to the agreement, Paramount had the right to market and distribute all animated movies made by DreamWorks for seven years with an upper limit of 13 movies. The deal was up for renewal, but DreamWork entered a five-year agreement with 20th Century Fox. Additionally, the last movie under the agreement with DreamWorks, Rise of the Guardians, gave disappointing results for the company.
Although the situation is not very bad, Paramount's latest release in the second-quarter of 2013, Hansel and Gretel: Witch Hunters gave it a good start. And, upcoming movies like G.I. Joe: Retaliation, Star Trek 2, Paranormal Activity 5, Anchorman: the Legend Continues, etc., provide Viacom a strong pipeline for 2013.
The company also has an aggressive share buyback plan. In the first-quarter it spent $700 million on share buybacks and has an intention of doing the same in the second. For 2013, it plans to make repurchases worth $2.5 billion, and last year’s buyback of $2.8 billion proves that it is capable of doing so.
The past-quarter was not so good, but the future pipeline and buyback program might make me buy the stock.
So, what’s the take?
The performance of all the three stocks directly co-relates to the success of their movies. Warner's robust pipeline of movies in 2013 and beyond gives it a decent position. Also, its initiative to spin-off the declining publishing business strengthens the current position of the stock.
The past quarter was not a very good one for Viacom. The loss of the deal with DreamWorks will impact the company's performance, but the aggressive buyback program and the upcoming movies from the production house should give it a much-needed boost.
Because of its long list of upcoming movies, the increased number of theaters and focus on China makes me bullish about IMAX.
Madhu Dube has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation 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!