I grew up watching movies. My grandfather ran a Canadian cinema chain that's now part of Cineplex Galaxy and I've loved the movie business ever since. While its had a tough go in recent years, I believe the record gas prices we're facing this summer will keep people close to home, going to the local movie palace to enjoy their favorite actors and actresses in comfortably air conditioned theaters. If my premise plays out, there are several ways to benefit from the increase in attendance. We'll look at three companies operating in the film business.
Entertainment Properties Trust (NYSE:EPR)
This real estate investment trust (REIT) is the largest owner of entertainment-related property in North America, with properties that cover 6.6 million square feet of real estate. Tenants include AMC Theaters and Regal Entertainment Group (discussed later). If you're a movie buff, you've definitely been in one of this company's theatres. It owns 71 across North America with 1,525 screens in total. The average theater has 19 screens, most less than five years old.
In addition to the movie theaters, which represent 51% of the company's total revenue, the remaining 49% comes from real estate development in the U.S. as well as parts of Ontario, Canada. With assets over $2 billion, it has branched out into ski resorts, vineyards, charter schools and other entertainment venues. It's an eclectic collection to be sure, yet very profitable. (To learn more on REITs and real estate, see The REIT Way and Basic Valuation Of A Real Estate Investment Trust.)
Five Reasons To Own This Stock
1. Revenue has a compound annual growth rate (CAGR) of 21% in the past three years. Funds from operations have grown 17% in the same period.
2. The operating margin is 67%. There are only 18 people working at the company and the general and administrative expenses are only 5.5% of revenue. That's lean.
3. Company guidance in 2008 is for funds from operations to be between $4.52 and $4.62 per share, growing 10% year-over-year.
4. From the above number, the REIT will pay a dividend of $3.36, yielding 6.6% at today's prices.
5. Co-founder of Capital Growth Management, Ken Heebner's CGM Realty Fund (CGMRX) owns 2.6% of the stock. Anything Heebner owns, I want a piece of.
Two Possible Co-Stars
As David Brain, CEO of Entertainment Properties Trust pointed out in the company's fourth quarter conference call, the domestic box office actually grew by 5% in 2007. One of the companies to benefit from the robust business was Dream Works Animation SKG (NYSE:DWA) whose film "Shrek the Third" brought in $322.7 million in domestic box office receipts. There were other successes but that was the big one. Revenue grew by 94% in 2007, which translated to a whopping $2.17 per share, way up from the 15 cents per share in 2006. On tap for 2008, it has "Kung Fu Panda" coming out in June with Jack Black providing vocal support. It should do well with the Olympics later in the summer.
Third on our list is, Knoxville-based Regal Entertainment Group (NYSE:RGC). It is the largest theatre chain in the U.S., with over 6,300 screens in 527 theatres in 39 states. You can't miss this company if you want to go to the movies. On January 15, Regal announced the acquisition of Consolidated Theatres, a 28-theatre chain in the Southeast U.S. that will be immediately accretive to earnings. In addition, the joint venture with IMAX (Nasdaq:IMAX) for 31 projection systems in the theatres in 2008 should make it a very good year. Oh, and I did I mention it pays a dividend of $1.20 or 6% at current prices. Regal's largest, publically traded, rival is Cinemark Holdings (NYSE:CNK) with 4,700 screens in 408 theatres.
Bottom Line
Some feel that the movie going experience is overrated and due for a fall. This is not a new theory mind you; they said the same thing about the cinema business with the introduction of VHS back in the 1970s. Having grown up around the business I know how tough it is. To excel, you always have to be entertaining the customers. That's why they say, "There's no business like show business!"