With big franchise films like “Thor”, “Spider-Man” and “Star Wars” coming out this year, and as theaters move beyond the “popcorn and soda” concession era, it’s a good time to gauge the profit potential of big theater stocks.
Performance-wise, blockbuster season seems to be going great guns for movie studios and movie theater complexes. Here’s a snapshot, by gross, of the tent pole films out this summer, taken July 10 from BoxOfficeMojo.com:
— “Beauty and the Beast” — $504 million
— “Guardians of the Galaxy 2” — $385 million
— “Wonder Woman” — $368 million
— “The Fate of the Furious” — $226 million
— “Spider-Man: Homecoming” — $117 million on its opening weekend
Two other blockbusters, “Thor: Ragnarok” and “Star Wars: The Last Jedi” will come out in November and December.
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While the numbers for current releases look robust, at least for the cream-of-the-crop films, theater stock analysts aren’t convinced strong ticket sales will translate into higher investment returns.
“The outlook on movie theater stocks in the short term is to expect continued underperformance and selling as momentum in three key movie theater stocks, AMC Entertainment (ticker: AMC), Regal Entertainment ( RGC), and Cinemark Holdings ( CNK) are problematic,” says John Butcofski of Captain John Charts LLC.
The worst of the downward trend for theater stocks may already be in the rearview mirror. “It appears the majority of the downward move may have mostly already taken place,” he says.
Yet the underlying reasons for underperformance are still in place. “In the movie theater space, all three companies failed fundamentally, showing a decline in ticket sales despite incredible high definition screens and sound and addition of alcoholic beverages,” Butcofski says.
Another key factor in properly assessing movie theater stocks is average ticket prices, which are trending downward in 2017. Average ticket prices rose by 3.2 percent in 2015 and 2.6 in 2016, according to Box Office Mojo. But this year, the average ticket price has fallen by 2.2 percent.
“That’s led to the breakdowns in 2017 theater stock charts of 2017 year-to-date prices,” Butcofski says. “That’s not because of incredible movie selections or from theaters offering more concession choices. The fundamental changes the theaters are making haven’t just haven’t had time to work, so stock charts for AMC, Regal Entertainment and Cinemark still need to hit their bottom and retest successfully before we may see higher highs and lower lows.”
Industry insiders say that film quality has much to do with lower ticket volume, relative to 2015 and 2016.
“Blockbuster seasons has been a disaster,” says Adi Shankar, a movie producer who steered movies such as “The Grey,” “Lone Survivor” and “Judge Dredd” to the silver screen. Shankar says that, with the exception of the Marvel franchises, the vast majority of movies are underperforming domestically, and social media trends show audiences are “growing increasingly apathetic,” he says.
“More importantly, the qualitative indicators, such as franchise awareness and perceived movie stardom, that used to guarantee audience turnout are no longer driving foot traffic because the youth are hyper-engaged in other forms of entertainment and consume content by their icons who exist in other mediums,” Shankar says. “The consensus here in Hollywood is that the over-reliance on sequels has eroded the prestige factor of movies as a pinnacle art form and the theater as a temple of it.
“I would steer clear of any theater stock or any stock for an ancillary business to the theater as this is showing a concerning downward trend each passing year,” he says.
Instead of focusing on movie theater stocks, investment professionals say the companies that actually produce the movies might be a better bet.
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“Two of the biggest blockbuster movies of the season are “Wonder Woman” and “Beauty and the Beast,” says Robert Johnson, chief executive officer at The American College of Financial Services, in Bryn Mawr, Pennsylvania.
“Wonder Woman,” which is part of the DC movie series that also includes Superman, Batman and upcoming “Justice League” films is made by Time Warner ( TWX). “Beauty and the Beast is the latest Walt Disney Co. ( DIS) film. Disney will benefit from the continued films in the Star Wars franchise, which it purchased in 2012.
Investors should be careful not to overreact to a blockbuster movie — or a bust for that matter, Johnson says. “The companies that produce these movies are large, and even a mega hit doesn’t impact earnings as much as many investors believe,” he says. “What matters to entertainment companies is a long-term ability to produce popular entertainment, and ideally a franchise.”
Here’s how Johnson views Time Warner and Disney:
Time Warner. TWX also owns the HBO cable network that produced the popular “Game of Thrones,” TV show. “Time Warner appears to be attractively priced — selling below market at a price-earnings ratio of 15.39 times forward earnings,” Johnson says. The company has a modest 1.6 percent dividend yield and sells at a forward PEG ratio of 1.62, compared to the Standard & Poor’s 500 index PEG ratio of 1.82.
“In theory, the lower the PEG ratio the better — implying that you are paying less for future earnings growth,” Johnson says. “The market has favored TWX over the past 52 weeks, as its price has advanced by 29.5 percent, while the S&P 500 has advanced 12.75 percent.” Over the next five years, analysts that follow this company are expecting its earnings to grow at an average annual rate of 9.5 percent, Johnson says.
Walt Disney. Disney sells at a forward PEG ratio of 2, Johnson says. Its P/E ratio is 15.35, which is less than the market average, and it has a decent dividend yield of 1.9 percent. “Over the next five years, analysts that follow this company are expecting its earnings to grow at an average annual rate of 7.67 percent,” Johnson says.
“DIS is a franchise that can’t be ignored,” he says. “Despite theme part and movie profits soaring, the company’s stock has been under pressure recently because of issues with ESPN. Investors in Disney are likely not to be disappointed if the stock is a long-term, core portfolio holding.”
With the summer blockbuster season in full swing, it might be movie makers, and not movie theaters, that deserve a close-up by investors. Start with the big names above, and table any theater picks for the time being — at least until “Star Wars: The Last Jedi” hits theaters in December.
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“There are many big hits scheduled to be released in the second half of the year by Disney and Sony ( SNE),” says Andrew Denney, founder and CEO of Prosperity Financial Group, in Springfield, Missouri. ” Does this mean someone should run out and buy theater stocks? Probably not. Buying on short-term expectations never translates to large portfolio gains over the long term.”
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Movie Blockbusters Abound, But Not for Theater Stocks originally appeared on usnews.com
