Key Events for Investors in the Movie Rental and Exhibitor Sectors
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 December 31 and January 13, 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 12/31: Looper ($66).
o 1/8: Ted ($219), Ice Age: Continental Drift ($161), The Bourne Legacy ($113).
Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):
o 1/3: The Hangover Part II ($255), Cowboys & Aliens ($100), The Debt ($31), Don’t Be Afraid of the Dark ($24).
o 1/10: Moneyball ($73), Killer Elite ($25).
*estimated release date
Over the next two weeks, there is one notable rental release compared to three last year (notable releases are those that grossed over $50 million in domestic box office). DVD rentals for the upcoming two-week period should underperform the comparable period last year, as there was a deeper and higher grossing release slate in the year-ago period.
Redbox Instant by Verizon (NYSE:VZ) recently launched its public beta. At our California Dreamin’ conference held in December, management explicitly stated that Coinstar (NASDAQ:CSTR) will not be required to fund minimum payments to the content providers, with Verizon absorbing the downside risk should the service prove to be unpopular. Coinstar will risk only its capital contributions up to a maximum of ≈ $158 million should the service not succeed, and we expect total Coinstar capital contributions to be no more than 20 – 30% of this figure. Additionally, effective April 1, J. Scott Di Valerio, Coinstar’s current CFO, will succeed Paul Davis as CEO, and Galen Smith, currently SVP of finance at Redbox, will succeed Mr. Di Valerio as CFO. Coinstar will release Q4 earnings on February 7 and will host an analyst day in San Francisco on February 27.
Few catalysts remain for Netflix (NASDAQ:NFLX). We continue to believe that domestic streaming growth will slow in 2013, as Netflix has already converted the vast majority of potential streaming subs on mobile devices, consoles, and smart TVs into paying subs, and the company faces competition from the Redbox Instant service. Consensus estimates for domestic earnings power appear overly skewed in favor of domestic streaming, which we think generates ≈$1.20/share, and we believe that Netflix’s DVD business (≈$3.00/share) will decline as international expansion (a loss of ≈$4.20/share) continues, making profitability in 2013 unlikely. We continue to think the stock is overvalued, which we believe will become evident when Netflix reports its Q4 earnings on January 23.
Q4 box office ended up…
16% compared to our up 15% estimate. October ended up 10%, led by Taken 2, while November ended up 26% primarily due to new releases Skyfall and the final Twilight installment. The Hobbit: An Unexpected Journey led December releases, along with an array of strong titles during the month.
December ended up 9.3% compared to our up 8% estimate. In line with our expectations, there was some deceleration in the end of December as seven of last year’s top ten movies were released in the second half of the month compared to four this year.
We expect Latin American box office to have increased at least 10% in Q4. According to boxofficemojo.com and our estimates, box office in the Latin American markets we track are trending up 20%, which we believe may be overstated as it is only a weekend measure. We believe our estimate leaves room for error as well as any foreign exchange impact to Cinemark (NYSE:CNK).
Q1:13 is tracking up 20.6% quarter-to-date, but will likely trend down throughout the quarter. Notwithstanding a solid start to the quarter, Q1:13 is up against a strong +24% comp. We expect a negative low-to-mid single digit comp in Q1.
Carmike (NASDAQ:CKEC), Cinemark, and Regal have all announced domestic acquisitions in Q4. Carmike completed two acquisitions in Q4, the first for 16 theaters including 251 screens from Rave Reviews Cinemas for $19 million in cash and $100.4 million of assumed lease obligations. We estimate that Carmike paid ≈ 5x EBITDA, and that adjusted EBITDA will increase by ≈ $22 million in 2013. In addition, Carmike recently announced an acquisition for two theaters with 16 screens from Phoenix Big Cinemas, without disclosing any financial terms. Cinemark recently announced an acquisition of 32 theaters with 483 screens from Rave Reviews Cinemas for $240 million, likely funded by cash from its recently completed $400 million senior notes offering. We estimate that Cinemark paid ≈ 5.8x EBITDA, and that adjusted EBITDA will increase by ≈ $50 million in 2013. Regal (NYSE:RGC) completed an acquisition of 25 theaters with 301 screens from Great Escape Theaters for $91 million in cash for a multiple of ≈ 5.5x cash flow. We estimate that adjusted EBITDA will increase by ≈ $20 million in 2013.
Michael Pachter is an analyst at Wedbush Securities.
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