Movie Exhibitor Stocks Fall on Rising Film Rentals

Hollywood Sign 3 - H - 2015

Analysts challenged Carmike CEO David Passman and CFO Richard Hare to defend film rental costs.

Concerns over the rising percentage that studios get for ticket sales had the major movie exhibition stocks falling on a strong day for the rest of the markets, even though several analysts issued positive notes Tuesday.

Carmike Cinemas, which posted mixed quarterly earnings Monday, fell 7 percent Tuesday; Cinemark fell 2 percent and Regal Entertainment fell 1 percent. The S&P 500, on the other hand, was up more than 1 percent.

During a conference call with analysts Monday, Carmike CEO David Passman and CFO Richard Hare were challenged to defend film rental costs that rose to 58.7 percent from 56 percent a year earlier. Management blamed the phenomenon on the high concentration of blockbuster titles of late, like Jurassic World, Furious 7 and Avengers: Age of Ultron.

"The top three films were over $300 million each, and that is going to bring with it some higher film rent just because of the scale, and I guess we can cry all the way to the bank," Passman said Monday.

"You say you're laughing all the want to the bank; I'd like to see more operating leverage," Piper Jaffray analyst James March told the CEO.

Later, Jeff Logsdon of JBL Advisors asked: "I won't beat the dead horse again, but I will ask it a little bit differently. Is anybody at any film level of revenue getting more than 62 percent in film rentals?"

"We don't discuss or disclose what individual films cost us," Hare informed the analyst.

On Tuesday, Michael Pachter of Wedbush Equity Research called the 58.7 percent film-rental number the highest he has ever seen, but he also reiterated his "outperform" ranking on the stock and his $35 price target. Carmike shares closed Tuesday at $24.11.

Part of his bullish thesis is Carmike's ability to extract more money from its patrons at the concession stands. In the most recent quarter it was $4.75 per person, up 9 percent from last year. As Carmike introduces more elaborate dining — including alcohol — into more of its theaters, the figure should keep on rising.

Likewise, David Miller of Topeka Capital Markets on Tuesday reiterated his "buy" rating on Carmike and $40 price target, not only bullish on concession sales but also the current-quarter slate of films, including Trainwreck, Minions, The Man From UNCLE, Fantastic Four and Mission: Impossible – Rogue Nation.

Eric Wold of B. Riley also reiterated his "buy" rating on Carmike, though he did slice his price target by $4.50, down to $35. Wold said the year-over-year jump in film expenses cost Carmike $2.3 million in earnings before interest, taxes, depreciation and amortization.