Movies Industry Analysis for Investors
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 September 24 and October 7, 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 9/25: Battleship ($65).
o 10/2: The Avengers ($623), The Five-Year Engagement ($29).
Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):
o 9/30: Transformers: Dark of the Moon ($351).
o 10/4: Hanna ($40), Scream 4 ($38).
*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 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 the upcoming two-week period to outperform the same period last year, as Madagascar 3 ($215 million in domestic box office) and Snow White and the Huntsman ($155 million) compares to last year’s release, Zookeeper ($80 million). With The Avengers release on October 2, it is likely that October this year will outperform last year.
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. Investors still have no information about pricing and features, although Verizon recently stated that the service will debut in time for the holidays, so we expect further details soon. We have heard rumblings from industry sources that the service could launch as soon as the first week in November, meaning that details on pricing and features could be forthcoming when Coinstar reports on October 25. Increasing streaming competition from Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX), among others) limits the opportunity, in our view, and we think that 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 October 3, Coinstar announced another new venture in which it will sell live event tickets via its existing Redbox kiosks. The new venture is currently being tested in Philadelphia with a $1 fee per ticket sold.
Competition is intensifying for Netflix. Amazon recently 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 feature film content (eight years and younger) offered by Netflix. The addition of costly EPIX content signals to us that Amazon is one step closer to offering a subscription service of its own, and makes Amazon’s offering competitive with Netflix. We expect Netflix shares to again trend down after the company reports Q3 earnings, as we believe investors will again be disappointed in 2H domestic subscriber additions given unrealistic guidance and increasing competition. In our view, consensus estimates for domestic subscribers and earnings remain too high, and we expect the company to lower net domestic streaming subscriber guidance by 1 – 1.5 million.
We recently revised our Q3 estimates for our covered exhibitors to reflect Q3 box office of down 6.9%. According to boxofficemojo.com, domestic box office results for the quarter ended September 30 were down 6.9%. Regal’s (NYSE:RGC) quarter ended September 27, resulting in Q3 box office down ≈ 5%. The few Q3 hits did not offset a number of misses at the domestic box office. July began well, with late-June releases performing above expectations, but July releases mostly disappointed. The Dark Knight Rises was the standout summer blockbuster as expected, but was negatively impacted by the Colorado incident. August was plagued by cannibalization from the Olympics and a generally weak box office, while September releases were uncompelling.
We estimate that Latin American box office trended down in Q3 in U.S. dollars, while trending up in local currency. According to boxofficemojo.com and our calculations, and after weighting each market, we estimate that Cinemark’s (NYSE:CNK) combined Latin American markets were up 2% in local currency after accounting for the additional theaters Cinemark acquired last year.
Q4 quarter-to-date box office is trending up 36% after the first week. Q4 has started well, primarily driven by better-thanexpected box office receipts for Taken 2 in its opening weekend. This offset a weak opening weekend for Frankenweenie, which is slated to appear on IMAX (NYSE:IMAX) screens for the full month of October. We expect the month to balance out and end up 1.3%.
Michael Pachter is an analyst at Wedbush Securities.