Screens’ Stars Make a Comeback : Amid High Box-Office Expectations, Theater Stocks May Be Just the Ticket

For investors, buying stocks in movie exhibitors is no longer an edge-of-your-seat experience.

A decade ago, the virtual demise of movie houses was predicted, what with the proliferation of video and laserdisc equipment, direct-broadcast satellite sets, and home theater systems boasting of top-quality sound. One consultant’s dismal report predicted that by the late 1990s, theaters as we know them would practically be extinct.

Not only did that not happen, but the nation’s box office is shattering records--last year domestic box-office receipts totaled $5.9 billion--as people continue to opt to see movies outside of the home. And it appears as if the box office is headed for another record this year, provided Hollywood’s planned summer blockbusters deliver as expected.

I ndeed, analysts and industry executives believe theater chains are poised to enjoy one of the better summers they’ve had in some time. This year, there’s no Olympics, as there was in 1996, to cut into the summer box office. Also helping matters is that Hollywood is fully loaded this year heading into the all-important summer season.

For starters, there’re such high-powered sequels as “The Lost World” from Steven Spielberg, “Batman & Robin” and “Speed 2.” There’s also a batch of films carrying big expectations, such as “Men in Black,” “Con Air,” “Face Off,” “Contact,” “George of the Jungle” and Walt Disney’s animated feature “Hercules.”

The fight for audiences is likely to leave some studios bloodied, given the big-dollar budgets of many films and the odds that some movies will fall by the wayside as the competition intensifies.

For exhibitors, however, the slugfest is good news. Hollywood studios will be spending a fortune on marketing to keep the crowds coming into the theaters through Labor Day. That means bigger ticket sales, which account for about 70% of theater revenue.

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More important, it means selling more high-priced popcorn, candy and soft drinks, the fat-margin items that account for the bulk of the theater chains’ profits.

Indeed, some exhibitors wish Hollywood would spread its summer season into the fall, challenging conventional wisdom that hit films should be released in the summer and during holiday periods.

They point to recent major hits released during the normally slow first quarter, such as “Liar, Liar,” the re-release of the “Star Wars” trilogy and “Jerry Maguire”--which did a substantial amount of its business in January and February--as evidence that people will flock in big numbers to theaters to see appealing films regardless of when they are released.

“There’s no question that on paper it looks to be a phenomenal summer,” said Howard Lichtman, executive vice president of Cineplex Odeon Corp. But “as an exhibitor, we sit here and say it’s a horn of plenty, so plentiful that it would be in everyone’s best interest if we could stretch it out.”

Also helping theater chains are the benefits of major capital spending the last couple of years. Many chains built huge new multiplexes and closed older, less profitable theaters. Chains also have been spending to upgrade sound systems, to install more comfortable seats and to add profitable, high-end snacks and drinks such as gourmet coffee.

In addition, with real estate developers looking increasingly to theaters as critical anchors for new entertainment and dining developments, movie chains are able to exercise more clout when it comes to negotiating rents.

Analyst Paul Marsh of Cowen & Co. believes that the future for exhibitors lies in continuing to build more and more screens on fewer and fewer sites. He sees the number of theater locations dropping in the next couple of years from about 5,000 now to 3,500, but the number of screens rising from about 25,000 to 28,000.

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He also sees theater chains increasingly becoming part of “location-based entertainment centers” that might also feature such draws as an Imax theater, a Planet Hollywood-style themed restaurant and other attractions aimed at getting people out of the house.

For investors, there are five major players to choose from among publicly held theater chains: Cineplex Odeon (ticker symbol: CPX), AMC Entertainment Inc. (AEN), Carmike Cinemas Inc. (CKE), Regal Cinemas Inc. (REGL) and GC Cos. (GCX), parent of the General Cinema chain.

Bonds of industry leader United Artists Theatre Circuits, which went private in a buyout, still trade publicly as well.

Most of the remaining chains familiar to the public remain family-owned, such as Newport Beach-based Edwards Cinema Corp., or are owned by a Hollywood studio, such as Sony Pictures Entertainment’s theater chain (formerly Loews) and the Mann Theaters chain, whose parent company is jointly owned by Viacom Inc.’s Paramount Pictures and Time Warner Inc.

Analyst Marsh likes Nashville-based Regal, which has been expanding rapidly by acquiring smaller chains and building newer theater complexes. Regal also gets high marks for efficiency.

Analyst Arthur Rockwell of Los Angeles-based Yeager Capital Markets is generally bullish on the entire industry, favoring industry giant AMC, based in Kansas City, Mo., and Columbus, Ga.-based Carmike, which has carved out a niche with multiplexes in medium-size towns largely in the South.

AMC’s stock took a beating last year, in part because of higher-than-expected costs for expanding, but it has been rebounding this year. The company is controlled by Chief Executive Stanley H. Durwood and is undergoing a complicated financial restructuring that will result in a larger chunk of the company being held by the public.

Meanwhile, Carmike’s management is credited with sticking to its strategy of focusing on smaller markets, although some analysts believe the company needs to develop larger multiplexes.

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Cineplex Odeon, a Toronto-based company burdened by about $332 million in debt and which was hurt by a strike by Canadian projectionists last year, has a stock that is hovering at less than $2 a share. The company has lost money for many years.

Still, Cineplex posted a profitable first quarter, thanks to the appeal of such movies as “Star Wars” and “Liar, Liar.” The company is 43%-owned by Seagram Co.’s Universal Studios, and 22% owned by the Charles R. Bronfman trust in Montreal. Bronfman and his family also control Seagram.

Finally, GC Cos. gets credit from analysts for keeping debt low and for trimming out unprofitable theater locations, but some analysts believe the company, which also has investments in optical superstores, German cable TV and other non-theater operations, needs to return more to its movie roots.

Some analysts suggest that the bigger-is-better push by theater chains means there could be a wave of mergers ahead as the industry seeks to consolidate and operate more efficiently.

In addition, U.S. exhibitors are looking at foreign markets as having huge potential, just as Hollywood studios have increasingly looked abroad over the last decade. Cineplex, for example, plans to expand in Eastern and Central Europe, and AMC has launched a major foreign expansion.

One danger, analysts say, is that chains will get carried away with their expansion dreams, especially in erecting gigantic movie complexes. They point to the new Ontario Mills mall, in which two chains built a combined 52 screens near each other.

“It’s a great business now, but it will become a terrible business if exhibitors start overbuilding,” Rockwell said.

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Multiplex Investing

Stocks of three of the five largest publicly held movie theater chains are trading near their 52-week highs. A look at the stocks:

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Ticker 52-week Monday % change Company symbol high/low close year to date AMC Entertainment AEN $34.50/13.63 $23.13 +61% Carmike Cinemas CKE 33.75/21.88 33.38 +32 Cineplex Odeon CPX 2.50/1.25 1.63 +9 GC* Cos. GCX 41.38/33.00 41.25 +19 Regal Cinemas REGL 34.25/22.75 31.50 +2

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Source: Bloomberg News