Commentary: In a darkened showbiz theater, exhib stocks are putting on a show


NEW YORK -- Investors have been dumping almost all media and entertainment stocks amid the recession, credit crunch, slowing DVD sales and ongoing challenges of new technology. But they have started to warm up to one sector that until recently seemed to hold little appeal: exhibition.

"There has been a sentiment shift," Piper Jaffray analyst James Marsh says.

The sector -- which includes Regal Entertainment Group, Cinemark Holdings, Carmike Cinemas and, depending on the definition, cinema ad firm National CineMedia -- was nearly left for dead a few years ago because of DVD growth, home theater systems and bankruptcies.

"Even six months ago, the bear case against these companies was that they have high debt ... and the consumer is getting beaten up in the recession," Marsh says. "Today, I hardly get calls about (debt) issues anymore. Investors are not worried about the downside anymore but are more focused on the upside."

This could bring in more momentum investors, he adds, and with accelerating financial growth expected next year thanks to 3-D ticket premiums, growth investors also might jump on board.

Movie theater owners are free from many of the issues plaguing others in the industry. Despite the recession, the boxoffice went gangbusters in first-quarter 2009 -- a sign it remains recession-resistant after the sector was flat or gained during five of the past seven recessions.

Although consumers are getting hammered worse now than during previous downturns, movies are considered a cheap-enough entertainment option compared with sports, concert or live-performance tickets.

"The current level of U.S. consumer affluence may be sufficient to support some trading-down behavior that favors movie attendance," Wunderlich Securities analyst Matthew Harrigan says.

Boxoffice comparisons will be tougher later in the year, but Wall Street is bullish on the second-quarter outlook and summer tentpole schedule. Caris & Co. analyst David Miller calls it "exceptional." If the likes of "Transformers: Revenge of the Fallen," "X-Men Origins: Wolverine," "Angels & Demons" and the latest "Harry Potter" film put butts in seats, it could keep the cinema bandwagon rolling.

"Exhibitors often say their most important marketing tools are trailers, trailers and trailers," Marsh says.

Concession spending also has done well. Average concession sales per capita were up 2.9% during third-quarter 2008 and up 5.4% during the fourth quarter.

If that isn't enough positive news, buzz also has been on the side of cinema operators, with technology -- seen in the past as a competitor -- a key reason. This year's wave of 3-D films and the strong showing of Imax releases have made the big screen the subject of water-cooler talk again. Plus, 3-D premiums promise greater financial growth.

All this helped exhibition stocks to rare gains during the first quarter. The only cinema decliner was Carmike, the leader in digital and 3-D deployment with more than 90% of its circuit able to provide a digital experience. Analysts say the stock has a small public float and market cap, which tends to attract microcap investors rather than big institutional buyers.

The key question is whether the run-up of exhibitor stocks and sentiment improvement have gone far enough or whether there is more upside. The answer is less clear: Exhibitors' price/earnings and other multiples are well above those of other media conglomerates but at the low end of their longer-term range.

Overall, though, analysts like the stocks and recommend that investors acquire or at least hold on to them. One of the more careful, Chris White at Wedbush Morgan, has "hold" ratings on Regal and Cinemark shares given that the stocks already exceed his price targets of $12 and $9, respectively.

Others are selective. Barclays Capital's Anthony DiClemente and George Hawkey rate Regal "overweight" and Cinemark and National CineMedia "equal weight." Miller rates Regal at "buy" with an $18 price target, preferring it over Carmike.

Harrigan joined the exhibition bulls with a "buy" rating and $19 price target on Regal, touting its upside once it aggressively deploys 3-D technology. Marsh has "buy" recommendations on all three exhibitors he covers: Carmike, Cinemark and Regal.

The lesson: Movie theaters are good for escapism from the recession thanks to their entertainment and investment value.