Analyst Ups Target on Some Exhibitors but Predicts Decline in First-Quarter Domestic Box Office

"The filmed entertainment business is stable today," Wall Street analyst Michael Nathanson of Nomura Equity Research writes. "This is a statement we did not think was possible to make only a couple of years ago."

A Wall Street analyst Monday raised his price targets on Cinemark Holdings and Regal Entertainment Group, predicting that this year’s second quarter could see domestic box-office revenue rise 5 percent over the same frame last year when The Avengers and The Hunger Games were massive hits.

During the second quarter this year, the top-grossing films are projected to be Oblivion, Iron Man 3, The Great Gatsby, Star Trek Into Darkness, Fast & Furious 6, The Hangover Part III, Man of Steel, Monsters University and World War Z, wrote Michael Nathanson of Nomura Equity Research.

Nomura raised his target on Cinemark by $1 to $32 and on Regal by 50 cents to $16. The former closed 1 percent lower Monday to $28.79, while the latter closed fractionally higher to $16.34.

The analyst’s 27-page report, though, consisted of a look at the film industry at large, not just exhibition. Examining the big four studios -- Time Warner, News Corp., Disney and Viacom -- he concluded that revenue had dropped $3.7 billion from 2007 to 2012 but operating costs fell $3.4 billion over that frame, leading to a $300 million drop in aggregate profit for the period.

Despite the robust second quarter that Nomura predicts, he’s still estimating a 3 percent drop in domestic box office for all of 2013 compared with 2012. He says the current quarter could fall 15 percent.

Nevertheless, he concluded that “the filmed entertainment business is stable today. … This is a statement we did not think was possible to make only a couple of years ago, when DVD sell-through was crashing down and studio film costs were still inflated.”

His three reasons for optimism about the film industry:

• “2012 domestic box office demonstrates that a strong slate of films will bring people back to the theaters."

• “Home entertainment revenues appear to also be stabilizing, which is a key driver of industry profitability."

• “International box office continues to grow.”

On that last point, he says international box-office revenue represented 69 percent of worldwide receipts in 2012, up from 64 percent in 2006.

And of home entertainment, he cited the Digital Entertainment Group, which reported that U.S. consumer spending was virtually flat year over year after seven consecutive years of declines. He credits streaming revenue from Netflix and Hulu for making up for declining DVD sales.