Movie Stocks: Your Cheat Sheet to Key Investor Events

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 January 14 and January 27, including notable rental releases, box office figures, and recent company-specific news.

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Movie Rental Industry

Key Redbox releases this year (with domestic box office total in millions from www.boxofficemojo.com):

o 1/15: Pitch Perfect ($64), Diary of a Wimpy Kid: Dog Days ($49), Possession ($49), Frankenweenie ($35).

Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):

o 1/17: Dolphin Tale ($70), The Ides of March ($40), Courageous ($33), Abduction ($28).

o 1/24: Paranormal Activity 3 ($104), Real Steel ($84), Final Destination 5 ($43), 50/50 ($35).

*estimated release date

Over the next two weeks, there are three notable…

rental releases compared to one last year (notable releases are those that grossed over $50 million in domestic box office). DVD rentals for the upcoming two-week period should outperform the comparable period last year, as there is a deeper and higher-grossing release slate compared to the year-ago period.

Redbox Instant by Verizon 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 (NYSE:VZ) 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.

Although Netflix (NASDAQ:NFLX) has announced…

a number of new content deals in recent months, 2012 saw many subtractions from its streaming catalog. We expect higher costs to result in erosion of the quality and quantity of Netflix’s content library over time, resulting in higher churn, and we expect domestic subscriber growth to slow or stall completely in the next few years.  We expect slowing growth to be evident later in 2013, with fewer net domestic subscribers added year-over-year.  We have modeled flat yearover-year domestic subscriber growth (net adds of 5 million), but think that growth may remain elusive. Over the long-term, we expect profitability to remain challenged as content providers seek ever increasing royalties.

Exhibitor Industry

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. We expect the exhibitors to report Q4 earnings beginning with Regal in mid-February, followed by Cinemark (NYSE:CNK), and finally Carmike (NASDAQ:CKEC) will likely report in early to mid-March.

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.

Q1:13 is tracking…

up 9.2% 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 that becomes progressively more difficult throughout the quarter (up 10.3% comparison in January, up 24.1% in February, and up 38.1% in March).  We expect a negative low- to mid-single digit comp in Q1.

Carmike, Cinemark, and Regal 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 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. More recently, Regal (NYSE:RGC) completed a $250 million senior notes offering, which we expect it to use for a combination of debt repayment and future acquisitions.

Michael Pachter is an analyst at Wedbush Securities. 

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