When McDonald’s Corp. (ticker: MCD) sells more than 225 million hamburgers annually (that’s the yearly average for the fast-food giant), or when Starbucks Corp. ( SBUX) moves well over 1.3 billion cups of coffee annually, you’d rightfully think those firms were having a good year, financially.
Similarly, in the movie theater (or “exhibition” business as it’s called on industry analyst calls), when films like “Beauty and the Beast” earn more than $710 million worldwide at the box office or if movies like “Logan” and “Kong: Skull Island” clock in at $566 million and $393 million, respectively, you’d think movie theaters would be going great guns, too.
But that’s not the case, according to some Wall Street analysts. In a recent research note, Omar Sheikh, an analyst covering U.S. media and cable stocks at Credit Suisse, slashed his rating for key movie theater industry stocks across the board, citing “slowing growth” in both ticket sales and in concession stand revenues for exhibitors, even as movie ticket sales are running 6 percent higher in 2017 compared to 2016.
[See: 10 Skills the Best Investors Have.]
Sheikh downgraded top-line movie exhibitors like AMC Entertainment Holdings ( AMC), Regal Entertainment Group ( RGC), IMAX Corp. ( IMAX) and National CineMedia ( NCMI), citing reduced demand for major theater outlets going forward.
Despite boffo box office numbers through the first three months of 2017, Sheikh cites a laundry list of issues hampering movie theater industry growth in his note, including “modest growth” in box office growth for the remainder of 2017 and in 2018; “limited hope” for industry earnings growth; a change in the movie theater sector’s “exclusive industry theatrical window” (which currently stands at nine weeks); and weaker box office and concession sales growth worldwide, especially in China.
Another emerging headache for theater operators is screen advertising, which Sheikh sees dropping by 14 percent this year as companies seek to hawk their wares across a more diverse array of media channels.
As a result, sector stocks are all over the place, performance-wise. AMC, for example, is down 9 percent on a year-to-date basis, while Regal is up by 9 percent over the same period, although both stocks are getting an early spring boost from “Beauty and the Beast.” Additionally, there does seem to be upside for both stocks, with an average one-year target estimate for AMC of $37.15, and a thinner upside margin of $24 per share for Regal, which is currently trading at $22 per share.
Then there’s National CineMedia, which is really on the spot after analysts cut its target price from $21 to $13 per share, triggering a 5 percent decline in the company’s stock price.
It’s not like Sheikh is out in a limb — other sector analysts are downgrading movie exhibitors as well.
Eric Wold, an analyst with B. Riley, cut his firm’s average rating on movie theaters from “buy” to “neutral,” citing expected tough sledding in the second quarter of 2017 that would especially impact AMC, Cinemark Holdings ( CNK) and Regal — all of which were downgraded by Riley. Wold estimates that second-quarter box office growth will slide by 10 percent compared to 2016 and notes that the major movie exhibitors’ recent run-up in share prices will come to an end in the second quarter.
[See: High-Tech Investing: 7 Sectors to Watch.]
It all seems to add up to sluggish industry growth — but not for all theater chains.
“Sector stocks just aren’t performing well right now,” says John Weninger, president of Vision Wealth Partners, near Green Bay, Wisconsin. “AMC stock is underperforming the market as a whole over the past year and has been getting crushed year-to-date down around minus 9 percent.”
For investors mulling over the movie theater sector, Weninger does have one stock he likes: Cinemark Holdings.
“The company is faring much better and is actually outperforming the market, up around 11.5 percent year-to-date compared to the S&P, which is up around 5.3 percent through the end of March,” he says.
There are “two different tales” when comparing Cinemark to AMC, and the former comes out ahead on both fronts, he says.
“It comes down to how each individual company can either control costs or pass them on to customers to stay profitable,” Weninger adds. “Then they have to compete with in-home movie providers, such as Netflix, which really disrupts the movie theater business and places a lot of pressure on movie theater revenues.”
Industry observers generally agree that the movie theater industry is facing an uphill climb going forward, especially as technology continues to be a game-changer for film exhibitors.
“Right now the whole movie theater business is hanging by a thread; only the major tent-pole and franchise films, coupled with 3D and IMAX and luxury seating keep theaters solvent,” says Wheeler Winston Dixon, a professor of film studies at the University of Nebraska.
As more and more viewers opt for the ease and convenience of streaming films at home, and prices at the multiplex continue to rise, theaters are more marginal than ever, Dixon adds.
[See: Chinese ETFs: 9 Ways to Play the Middle Kingdom.]
“Hollywood is making a fortune, but much of that comes from Chinese markets, and of course China now has significant investments in theater chains in the U.S.,” Dixon says. “So the future for theater stocks is perilous; it’s boom or bust, and right now it’s booming, but when the novelties like 3D wear off, or if viewers get sick of franchises and start watching more long-form streaming series on Amazon and Netflix, they’re going to be in for a bumpy ride.”
More from U.S. News
7 Ways to Tell if a Stock Is a Good Price
Avoid These 8 Rookie Investing Mistakes
8 ETFs for Investors Who Love Value
Theater Stocks Suffer Even as Hollywood Scores originally appeared on usnews.com
