DEEP STOCK INSIGHTS: Movies and Entertainment Business Update
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 August 27 and September 9, 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 8/28: The Hunger Games (NYSE:LGF) ($405)**, Think Like a Man ($92), Pirates! Band of Misfits ($30).
o 9/4: Dr. Seuss’ The Lorax ($214), Safe ($17).
Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):
o 8/30: Rio ($144), Madea’s Big Happy Family ($53), Prom ($10).
o 9/6: Paul ($37), Your Highness ($22).
*estimated release date, **was originally slated for 8/21 but released on 8/28 according to www.redbox.com
Over the next two weeks, there is one notable rental release compared to one last year, classifying notable releases as those that grossed over $50 million in domestic box office. We expect the upcoming two-week period to underperform the same period last year, as Battleship ($65 million in domestic box office) earned well below last year’s release, Thor ($180 million). Additionally, the upcoming romantic comedy, What to Expect When You’re Expecting, will likely perform in line with last year’s comparable release, Something Borrowed, which both earned approximately $40 million in domestic box office.
We expect Coinstar (NASDAQ:CSTR) shares to be range-bound until pricing and features for Redbox Instant by Verizon (NYSE:VZ) are shared with investors. Information about pricing and features has not been forthcoming thus far, though we expect the service to launch prior to year-end, so details are bound to be released soon. Increasing streaming competition from Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX), among others) and potentially steep capital contributions could pressure Coinstar shares. We continue to believe that the recently completed NCR acquisition will be accretive by next year (roughly $0.50/share given 2,500 – 2,900 kiosk guidance), and believe that Coinstar’s coffee kiosks could generate as much as $0.65/share when fully penetrated. On balance, we would remain on the sidelines until details of the Verizon plan are announced.
On September 4, Amazon announced a new partnership with EPIX, just as Netflix’s exclusive two-year deal expired. We estimate that EPIX content constitutes approximately half of the new content (eight years and younger) offered by Netflix. The addition of EPIX content signals that Amazon is one step closer to offering a subscription service of its own, and makes Amazon competitive with Netflix. We expect Netflix shares to continue trending down, as we believe investors disappointed in Q2 domestic subscriber additions will again be disappointed in 2H domestic subscriber additions given unrealistic guidance and increasing competition. In our view, consensus estimates remain too high.
Domestic box office was down 7.5% in July. July began well, with late June releases performing above expectations. However, due to difficult comparisons and an otherwise soft summer release slate, July releases that performed in line with expectations, including The Amazing Spider-Man and Ice Age: Continental Drift, were unable to lift the comp to positive territory.
The Dark Knight Rises was the standout summer blockbuster as expected, but its success has been somewhat muted after the tragic events on its opening night. While we acknowledge the Colorado incident has certainly had an impact on ticket sales for TDKR, we believe that its box office run has been longer as a result. Still, we believe a large number of moviegoers are content to watch in the safety of their homes during the rental window, in which case Redbox will be a clear beneficiary.
Domestic box office was down 9.9% in August due to cannibalization from the Olympics and a generally weak box office. We had expected moviegoers to head back to the theaters in droves after the Olympics had concluded. However, the muted response to August releases indicates that moviegoers are content to wait for more compelling fare. In particular, August action remakes and sequels such as Total Recall, The Bourne Legacy and Expendables 2 all opened below expectations.
Quarter-to-date domestic box office is trending down 6.9%, and our confidence that it will progressively improve over the remainder of the quarter is waning. We expected that after the Olympics, pent-up demand would drive higher receipts. However, late August releases were weak and September releases have not fared any better. It now appears that our expectation for Q3 box office of up 1.2% is bullish, and will likely come in closer to down 7%. Short of a box office miracle in September, we will revise our Q3 estimates for our covered exhibitors as the Q3 box office comes to a close.
Michael Pachter is an analyst at Wedbush Securities.