Movie Theater Owners Get Mixed Wall Street Reaction

While some analysts cite continued box office appeal and upside potential for stock prices, others raise concerns about high 3D price premiums and looming premium VOD trials.

NEW YORK -- Shares of movie theater groups have seen a mixed performance so far in 2011, following similar trends last year, with stocks of some sector biggies up sharply, while others are down.

Amid this continued mixed bag of performance a Wall Street conference on Thursday will put the spotlight on the sector and its players, on which investors and observers have seemed so split.

While many analysts cite continued solid box office trends, an enduring appeal of theatrical releases and low stock prices, others, such as BTIG analyst Richard Greenfield, have raised concerns over high 3D price premiums and such film window issues as looming premium VOD trials by cable and satellite TV firms.

At Gabelli & Co.'s third annual Movie & Entertainment Conference here on Thursday, industry executives -- from NATO president John Fithian to Imax CEO Rich Gelfond and Regal CEO Amy Miles -- will take their pitch to investors and share latest thoughts on trends and issues affecting the industry.

At Wednesday's market close, the stock of Regal Entertainment, the largest U.S. exhibitor, stood at $13.62 after closing 2010 at $11.74. That is a gain of 16 percent year-to-date as the stock has bounced back after a decline last year.

Meanwhile, Cinemark Holdings is up 8.4 percent year-to-date after also bringing in a gain in 2010. But Carmike Cinemark shares and Imax, which was one of the strongest entertainment industry gainers last year, have trended lower year-to-date.

With that backdrop, AMC Entertainment just announced earlier in the week that it is moving ahead with a planned IPO.

What are investors to make of the mixed performance of sector stocks, and which ones look like winners from here?

Gabelli analyst Brett Harriss is bullish on the exhibition sector overall, citing a flat 2010 box office following a big 2009 jump, "a great 2011/2012 slate" and continued 3D growth. Plus, he said that "stocks are attractively priced." Added Harriss: "Exhibitors are not very sexy, so there are no massive over-valuations like in other sectors."

While both stocks have been trending up, he has "buy" ratings on Regal, whose stock declined in 2010, and Cinemark, his sector favorite in part because of its fast-growing Latin American circuit, shareholder-friendly management and its stock's discount relative to Regal.

Greenfield has a much more bearish view on the industry and Regal, the only sector stock he currently covers.

"Pricing is too high with 3D, new windows will encroach on theirs, and splits could start to fall, hurting exhibitor profits," he summarized some of his concerns. "There is a lot of technological change. And as studios are seeing the movie business losing its major monetization engine, DVD sales, the studios must actively explore new ways of making money, and so windows are going to shift."

Greenfield has a "sell" rating on Regal.

Asked if the firm's dividend payments do not encourage him, he cited current trends that may pressure business models going forward. "I don't think there will be an end to going to the movies," Greenfield emphasized. "But I'm not as confident that exhibitors will pay big dividends in years to come as their business shrinks."

He recently also criticized Regal for touting the profits it makes on popcorn while charging consumers high ticket and concession prices that, he argued, could alienate customers.

Benjamin Mogil, analyst at Stifel Nicolaus, shares more of Harriss' outlook on exhibitors. He has a "buy" rating on sector stocks, saying "we think the summer slate is strong."

But he acknowledged that between box office trends and news windows, investors have often shifted focus between what are perceived as good and bad news. "It depends on the day," he said when asked what drives exhibition stocks most -- box office or window and technology fears.

Beyond the future of 3D and other topics, Thursday's conference will discuss how much of a threat premium VOD really is for the sector. The cover of a book for atttendees features Darth Vader with a name tag that says VOD, Harriss said.

His take on premium VOD: It is a threat, but mitigated by the fact that the theatrical window has traditionally worked well for studios. Plus, exhibitors can threaten to start charging studios for those trailers they have in the past attached to their releases for free, which he estimated are worth about $1.5 billion in advertising, Harriss said.

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