Media and Entertainment Companies Ready to Roll Out the Red Carpet
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The U.S. media and entertainment industry is expected to reach $632 billion in 2017 up from $479.23 billion in 2012. Technological developments, films popularity, and rising individual income level are all fueling industry growth. In this article, three companies from the industry are adopting various strategies like screen expansion, acquisition, and technology updates to keep pace with the growth. Let’s discuss them in detail.
Television production growth and new films expectations
Lions Gate Entertainment (NYSE: LGF) is diversifying its TV production business into high growth potential businesses by delivering content to broadcast networks and digital platforms. The demand for digital content is rising with the increase in user of laptops, smart phones, and tablets. It will now produce series for broadcast networks and digital players in addition to cable networks.
For this, it established a relationship with Netflix for streaming the debut of ‘Orange is the New Black.’ The company is also making a comedy series for Hulu and Amazon. It will receive higher licensing fees on these series compared to series sold to cable networks.
Further, the company expects its television segment to produce 60% more programming hours in this fiscal year, compared to last year. The diversification is expected to accelerate its TV production business revenue to $480.2 million this fiscal year and $569.4 million next fiscal year compared to $379 million last year.
The company has slated 13-16 films this year compared to 20 films last year. Lion Gate has higher expectation from the release of its film -- Catching Fire, a sequel to Hunger Games, in November, which is expected to generate gross revenue of $900 million worldwide, up 22% from the $690 million generated last year.
The other films are Ender’s Games, expected to be release in November, which could generate $36 million profit, and Divergent, expected to release in March 2014, and has the potential to generate profit of $130 million.
Despite the lower film slate this year, the company's operating income will rise to $331.9 million this fiscal year compared to $273.1 million last year. The increase in operating income will be due to lower promotional expenses, as the upcoming film is a sequel of the successful Hunger Games released last year, and will require less promotion.
International segment growth
Cinemark Holdings (NYSE: CNK) has good growth prospects in its international segment due to increasing mall development and improving infrastructure. It has international presence in Latin America and is the largest theater chain with 169 theaters and 1,343 screens in 13 countries.
The company is focusing on screen expansion and is planning to open 125 new international screens this year. It has further opportunity to open 100-150 screens per year in in next few years. With this screen growth, international revenue will rise to $776.7 million this year compared to $740.8 million last year.
The company’s free cash flow will significantly increase next year due to reduction in spending. However, this year capital expenditure will increase as a result of international digital projector conversion, higher new screen growth, and conversion of existing theaters with XD format.
Capital spending will normalize next year to $200 million-$225 million compared to $325million-$350 million projected this year. It expects the free cash flow to improve from $74 million this year to $225 million next year, after completion of this technology update. With this, the free cash flow yield will rise to 5.2% next year compared to the current year’s expected yield of 3.6%.
Hollywood Theaters acquisition will boost earnings
In April 2013, Regal Entertainment Group (NYSE: RGC) completed acquisition of Hollywood Theaters for $191 million cash and $47 million of lease obligation. The acquisition will result in the addition of 43 theaters with 513 screens, and it will enhance the company’s presence in 16 states and three U.S territories.
It reported revenue of $842.3 million in the second quarter compared to $723.3 million in same quarter a year ago. The additional screens acquired from this acquisition propelled revenue growth. The company also plans to open a new theater with 12 screens in the third quarter of 2013. With the increase in screens, total revenue will rise to $3.11 billion this year and $3.24 billion next year compared to $2.82 billion last year. The acquisition will boost the company’s earnings, and the EPS will rise to $1.10 this year and $1.20 next year compared to $1 last year.
On June 13, the company completed issuance of $250 million senior notes with interest rate of 5.75% due in 2023. It will use the proceeds from this issuance to fund a cash tender offer of approximately $213.6 million outstanding principal amount of its 9.125% senior notes due in 2018. After funding the cash tender offer, it will use the remaining proceeds for general corporate purposes. This refinancing will push the company’s debt maturity profile and will result in lowering the annual interest expense around $5 million.
The companies in the media and entertainment industry will witness growth through new releases, technological advancements, and expansion initiatives. Lions Gate Entertainment’s expansion of its TV production business and the release of new films will drive the revenue. Cinemark’s International expansion with new screens and significant spending reduction in 2014, after the hike this year due various technology updates, provides better future prospects. Regal Entertainment’s acquisition of Hollywood Theaters will boost earnings and debt refinancing will result in lower interest expense. I recommend buying all of these stocks.
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Shweta Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!