Movie exhibitors' stocks seeing big gains

Shares up thanks to 3D films and their premium ticket prices

NEW YORK -- With the Oscars putting a spotlight on last year's creative accomplishments in moviemaking, films' commercial successes have the nation's top movie circuits riding a hot streak on Wall Street.

Shares in exhibition companies have risen sharply since the last Academy Awards. In some cases, one-year gains exceed 100%.

Cinemark set a 52-week high on Tuesday, following similar spikes by Regal Entertainment Group and Imax. Carmike Cinemas, which focuses on smaller and midsize markets, hit a 52-week high in late 2009.

By contrast, exhibs were trading near 52-week lows last March. Since then, enthusiasm for 3D movies and their premium ticket prices has driven boxoffice to seasonal and annual records, helping to popularize exhibition stocks.

Still, the dramatic run-up inevitably has some pointing to signs of slowed stock momentum in recent weeks.

3D releases aren't guaranteed to be successful, and a recent debate over tightened theatrical windows spread concern over future exhib earnings. Caris & Co. analyst David Miller recently downgraded exhib stocks.

"We have run out of near-term catalysts," Miller wrote.

Janney Montgomery Scott analyst Tony Wible worried that the first half of this year may prove stronger than its final six months, despite an increased number of 3D releases in the latter half of 2010.

"Valuations are less compelling than before," Gabelli & Co. analyst Brett Harriss wrote. "But this remains a dependable business, and digital -- with possible alternative content -- and 3D can provide further upside."

Harriss has a "buy" rating on Regal and Cinemark, with the latter a current sector favorite. Gabelli next week will host a Digital Cinema & Movie Conference in New York, with execs from several circuits expected to attend.

"Cinemark has excellent management, great capital allocators and above-average U.S. operations and international diversification with operations in Mexico and Brazil," Harriss said.

James Marsh of Piper Jaffray says he still feels exhib valuations are "very reasonable."

"You have revenue growth and also profit growth these days, thanks to the better returns of digital and 3D," Marsh added.

But Caris' Miller recently downgraded Regal from "above average" to "average" and Cinemark from "average" to "below average" and cut Regal's share price target from $18 to $16. That despite a looming summer boxoffice season featuring attractive tentpoles such as "Iron Man 2," "Sex & The City 2," "Knight & Day," "Shrek Forever After" and "Toy Story 3."

"While that slate looks attractive at first blush, it simply does not stand out boldly enough against last year's lineup," the analyst wrote.

Others are more bullish on year-over-year revenue comparisons but worry over less room for stocks to grow this year.

Several analysts surveyed by THR cited third-largest U.S. exhibitor Cinemark as their top sector pick. Barclays Capital analyst George Hawkey prefers Regal and boosted its price target by $5 to $19.

Hawkey lauded Regal's pattern of paying shareholder dividends as a good strategy in "an uncertain environment."

Imax -- which hit all-time highs this year -- is drawing favorable attention for an improved business model. The Toronto-based exhib now focuses on commercial films such as "Avatar" in its proprietary format.

Imax thus will continue to be "a direct beneficiary of ticket premiums" on 3D tickets, Piper's Marsh noted.

Looking further ahead, Janney's Wible said exhibitors could see another revenue spurt in 2001, when 3D systems will be installed more widely. "People will start to appreciate that," he predicted.
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