Are Movie Theaters on Death's Door?


Movies are supposed to be hot during the summer. On top of getting a break from the heat outside, that’s when many of the annual blockbuster films are released by the major studios. After all, the kids are out of school and on vacation. Some time off of work for the adults also means more free time for more entertainment. That doesn’t always translate to a great investment model for movie theater chains. If Credit Suisse is right, movie theater chains feel like they are at death’s door in the summer of 2017. To make matters worse, there are risks ahead that could add even more pressure to movie theater owners well beyond 2017.

24/7 Wall St. covers many of the top analyst upgrades and downgrades each morning of the week. The downgrade brigade included a Credit Suisse report on Cinemark Holdings Inc. (NYSE: CNK) that effectively gave the movie cinema chain the equivalent of a “Sell” rating. It was actually a negative view on the entire movie chain sector.

Credit Suisse’s Omar Shiekh has noted that box office trends are weak so far in 2017. While that is a current-year weakness, Sheikh is worried about premium video-on-demand (VOD) potentially being around the corner. His view: consensus forecasts will come down for 2017 and 2018. If he is correct, then that means more analyst downgrades and lower expectations from other firms.

Cinemark was downgraded to Underperform from Neutral and the price target was cut to $34 from $38. Earnings estimates were also cut. Credit Suisse indicated that box office trends are weak and second-quarter revenues are on track to decline 2% versus 2016. Overall, the firm expects zero growth in 2017 versus 2016 as a whole. The problem is that the consensus estimates from analysts call for 2% to 4% growth this year. Sheik’s concern is that Cinemark’s earnings multiple will compress further in the back half of 2017.

If you want to know how and why this downgrade called for no growth and weakness in the second half, here’s why. Third-quarter movie theater industry trends are likely to be down 15% due to a tough comparison to the prior boost from “Secret Life of Pets.” This means that the fourth quarter’s box office will have to be up 15% from in 2016 just to make Credit Suisse’s numbers.

Cinemark shares took it on the chin, the worst of the whole theater lot on Thursday. Its stock was last seen down 3.6% at $38.40, and the 1.6 million shares that traded by mid-afternoon was already about 70% higher than normal. Cinemark shares have a 52-week trading range of $32.60 to $44.84 and a consensus analyst price target of $45.62. The company has a market cap of $4.5 billion.

AMC Entertainment Holdings Inc. (NYSE: AMC) was already rated as Underperform at Credit Suisse. The firm sees there still being some way from trough multiples, and AMC’s estimates were trimmed and its target price was cut to $20 from $26.

AMC shares were down 1.3% at $22.75 on Thursday, and they have traded in a 52-week range of $22.15 to $35.65. The stock has a consensus price target of $36.43, and the market cap is $3 billion.

Regal Entertainment Group (NYSE: RGC) was already rated as Underperform at Credit Suisse, but the firm said that the chain has weak trends and warned that its forecasts and multiples are just still too high. While raising some estimates, Sheikh lowered his target on Regal Entertainment to $17 from $19 in this call.

Regal shares were down 1.5% at $20.45 on Thursday. The consensus price target is $24.19, and the 52-week range is $19.61 to $24.79. Regal has a market cap of $3.2 billion.

IMAX Corp. (NYSE: IMAX) was maintained as Neutral and Sheikh’s call simply put the case as still being in no rush to buy the stock. IMAX’s estimates were cut and its target price was lowered to $26 from $33.

Imax shares were down 3% at $23.48 on Thursday, in a 52-week range of $23.40 to $35.30. The stock has a consensus price target of $34.54, and the company has a market cap of $1.6 billion.

National CineMedia Inc. (NASDAQ: NCMI) was maintained as Neutral at Credit Suisse but the firm worries that its dividend coverage is a key focus. Its dividend yield is 11% or so. The firm lowered estimates and slashed its target price to $8 from $12.

National CineMedia shares were last seen trading down 2.9% at $7.35. This company has a market cap of $1.2 billion. Its shares have a 52-week range of $7.13 to $16.10 and a consensus price target of $12.50.

In the Cinemark downgrade, which also acted as the same trends working against the other movie chains, Sheikh’s note signals that it is challenging to see premium VOD as an opportunity:

We continue to believe that studios will push hard for premium VOD rentals to begin in 2017. As we have previously highlighted, we struggle to see how a new window in week 4 priced at $50 won’t reduce industry profitability: the “average” $100 million movie attracts 2.6m theatre-goers in weeks 4-13, and assuming 25% of attendees in those weeks (6% of total attendees) switch to premium VOD, incremental demand from 1m people would be needed for the window to be accretive for exhibitors – this looks challenging. We also believe exhibitors have less leverage over studios than studios have over them, and that once an experiment begins, it will be hard to return to the status quo ante.

Movie chains have had a risk for almost two decades now that studios could eventually skip the movie chains and take movies directly to consumers. With broadband becoming ever more prevalent, it eventually might be more than just a risk. For now, we have to wait and see if this call is right or if it was too pessimistic.

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