Movie Theater Reopening Plans Face New Uncertainty Amid COVID-19 Case Rise

AMC Santa Monica March 17 2020

Most cinema giants have seen their market valuations cut in half, or worse.

Cinema stocks just can’t seem to catch a break this year. Disappointing movies early in the year were followed by the shutdown of circuits due to the novel coronavirus pandemic, resulting in release delays, liquidity concerns and a premium VOD dispute with Universal Pictures.

Despite a controversy about face mask requirements, things seemed to be looking up when the big exhibitors last week detailed their reopening plans for July. But now a new wave of delays of film releases due to a surge in COVID-19 cases has put pressure on exhibition stocks again and brought new uncertainty. 

On Thursday, Warner Bros. pushed Tenet from July 31 to Aug. 12, while Disney's Mulan is expected to give up its July 24 release date.

"Our prior stance that the second-half film slate should be considered very much in flux and a risk for the group has been playing out in recent weeks – causing the exhibitor group to meaningfully underperform the broader indices," B. Riley FBR analyst Eric Wold wrote in a Friday report. "In fact, since June 8, the pure-play exhibitors have declined by an average of about 35 percent versus a decline of only approximately 5 percent for the S&P 500."

With the first half of 2020 nearly finished, the broad-based S&P 500 stock index as of 12:30 p.m. ET on Friday was standing at a year-to-date decline of 6.4 percent. Over the same period, most cinema giants have seen their market values cut in half or worse. AMC Theatres’ stock is down 42 percent year-to-date as of midday Friday, Cinemark’s is down 65 percent, and shares of The Marcus Corp. are down 62 percent.

The stock of U.K.-listed Cineworld, which owns the Regal cinemas in the U.S., has lost 71 percent of its value in 2020, while Canadian exhibition giant Cineplex, which Cineworld had planned to acquire until the deal recently fell apart, has lost 70 percent.

While some might see a buying opportunity for depressed stocks, Wall Street observers are actually recommending few sector stocks to investors until the dust settles further.

Wold currently doesn’t recommend any of the exhibition stocks he covers other than Imax Corp., which he rates a "buy." On the others, namely AMC Theatres, Cinemark and Marcus, "we are remaining on the sidelines with ‘neutral’ ratings," he explained on Friday. "Although we continue to see a path toward more normalized attendance trends in late 2021 and into 2022, we believe the near-term film slate uncertainty reignites the focus on balance sheet liquidity for the exhibitor group."

This is where Imax's "highly variable operating cost" structure stands out, Wold explained, saying that he projects "cash visibility of nearly two years ... even under a zero-revenue environment." (The analyst also likes cinema advertising network National CineMedia for the same reason.)

Other analysts have been more bullish on Cinemark than its peers. Wedbush Securities' Michael Pachter, for example, has a "neutral" rating on AMC, but recommends Cinemark with an "outperform" rating. In a report earlier this month, he called Cinemark "a well-managed company with the most stable results in the industry, and therefore the best name to own within the space."

Pachter added: "The potential for prolonged theater closures and an uncertain consumer environment as the economy re-opens present a difficult challenge for Cinemark to navigate," but highlighted that the firm's management "has demonstrated that it can withstand closures and/or low utilization until early 2021."

Credit Suisse analyst Meghan Durkin in an early June report also cited Cinemark as her favorite exhibition stock, even though she has the same "neutral" rating on it as on AMC Theatres. "Among theaters, we continue to prefer Cinemark, given lesser New York City exposure and greater liquidity," she wrote.

Continued shifts in the release schedule are something analysts are keeping a close eye on. "Infections are up, the curve is inflecting upward instead of flattening, and a rollback of reopenings is likely," Pachter tells The Hollywood Reporter about the current virus pandemic trends in the U.S. "I don’t see the studios behaving irresponsibly by releasing films with no chance of an audience."

Wold noted in his Friday report that Warner Bros. recently pushed Wonder Woman 1984 from Aug. 14 to Oct. 2 and Godzilla vs. Kong from November to May 2021. "That still gave exhibitors some optimism that the late July slate remained relatively intact, with Mulan scheduled for July 24 and Tenet for July 31," he argued. "However, media reports began surfacing earlier this week that Disney is considering delaying the release of Mulan and then, after the close on Thursday, Warner Bros. announced that Tenet was moving again from July 31 to Aug. 12."

The analyst explained that shifting release dates was "extremely easy" for studios "given the relatively sparse film calendar in the second half."

However, "this puts the exhibitors in an increasingly difficult position given a choice between holding out on opening theaters at all until the release calendar is more certain and re-hiring and opening anyway to minimal box office demand with older library films (and likely doing so with negative operating cash flows)," Wold warned. "They do not control their own destiny with content."

Hal Vogel, CEO of Vogel Capital Management, tells THR it may take a while until investor sentiment improves for cinema stocks. Says the former entertainment industry analyst: "The stocks are likely to be down until the end of the summer, maybe longer."