The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
This biweekly newsletter lists key events in the movie rental and exhibition industries for the period between November 5 and November 18, including notable rental releases, box office figures and recent company-specific news.
Movie Rental Industry
Key Redbox releases this year (with domestic box office total in millions from www.boxofficemojo.com):
o 11/6: The Amazing Spider-Man ($262), Prometheus ($127), Arthur Christmas ($47), The Raven ($16).
o 11/13: The Campaign ($86).
Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):
o 11/8: Horrible Bosses ($117), Green Lantern ($117).
o 11/15: Pirates of the Caribbean: On Stranger Tides ($241).
*estimated release date
Over the next two weeks, there are two notable rental releases compared to one last year (notable releases are those that grossed over $50 million in domestic box office). We expect DVD rental for the upcoming two week period to outperform the comparable period last year, as Brave and The Expendables 2 earned over $300 million combined at the box office compared to $127 million earned by Super 8 last year…
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Redbox (NASDAQ:CSTR) has made a conscious decision to increase traffic and frequency of rentals and will purchase more inventory than it typically does in the fourth quarter to improve copy depth, placing pressure on profitability, as implied by guidance. In our view, the improved copy depth could appeal to both Redbox’s most loyal customers (by luring them back to kiosks more often for their second and third choices) and its occasional patrons as well (who will have an increased ability to rent their top choice in a given visit). However, revenue growth may take several weeks to return, and profitability will remain challenged throughout the quarter. Profitability and declining comps are on investors’ minds given the large drop in EPS from Q1 to Q4 of 2012, making a return to positive revenue and earnings growth imperative. Increased copy depth in Q4 will likely create greater demand into Q1, resulting in significant sequential EPS growth as inventory will require less frequent replenishment.
Few catalysts remain for continued domestic streaming growth at Netflix (NASDAQ:NFLX). We continue to believe there are few catalysts for continued domestic streaming growth, as Netflix has already converted the vast majority of potential streaming subs on mobile devices, consoles, and smart TVs into paying subs. We also view consensus estimates for domestic earnings power as overly skewed in favor of domestic streaming, which we think generates ≈$1.00/share, and we believe that Netflix’s DVD business (≈$3.00/share) will decline as international expansion (a loss of ≈$4.00/share) continues, making profitability in 2013 unlikely. Despite recent commentary from Carl Icahn, we see few potential strategic acquirers of NFLX, and think the stock is overvalued.
Q4 quarter-to-date box office is trending up 27.9% after another strong weekend. October ended up 10%, led by Taken 2, and November month-to-date is up over 50% due to new releases Skyfall and the final installment of the Twilight series. Skyfall is on track to be the highest grossing James Bond movie ever, and Twilight: Breaking Dawn Part 2 opened ahead of its Part 1 predecessor. Both movies contributed to a weekend up over 10% y-o-y despite a difficult comparison of up 90% last year. We note that Twilight: Breaking Dawn Part 1 opened on November 18 last year, so the high November month-to-date comp of over 50% will likely moderate in the coming week. Upcoming November releases include Life of Pi and Rise of the Guardians, which we expect to compare favorably to last year’s Thanksgiving week openings, The Muppets, Arthur Christmas, and Hugo.
We expect December to be up at least 5%. We expect The Hobbit will likely lead December releases, and compare positively to last year’s highest grossing December release, Sherlock Holmes: A Game of Shadows. We recall that in Q4:11 the release slate was crowded with single-genre weekends, and overall box office receipts suffered as a result. We do not view this as a risk to Q4:12 given a variety of blockbusters within all genres as well as more favorable timing of the release slate compared to last year. As a result, we view our Q4 box office estimate of up 6.2% as conservative.
Notwithstanding a likely very solid Q4, Q1:13 is up against a strong +24% comp. We expect a negative comp in Q1.
We estimate that Latin American box office is trending up on par with U.S. box office in Q4 in U.S. dollars. According to boxofficemojo.com and our calculations, and after weighting each market, we estimate that Cinemark’s (NYSE:CNK) combined Latin American markets are trending up nearly 30% in local currency in Q4 quarter-to-date.
Michael Pachter is an analyst at Wedbush Securities.
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