By: Colin Tweel
Like afternoon baseball games and crowded beaches, blockbuster movie releases are a staple of summer. If your summer visits to the local movie theatre, like mine, are accompanied by feelings of bewilderment over $13.00 admission tickets and $10.00 bags of popcorn, then you have strong reason to consider investment options in the movie industry.
Two prominent Canadian companies, Cineplex (TSX: CGX) and IMAX (TSX:IMX,NASDAQ:IMAX), and American behemoth Regal Entertainment (NYSE: RGC) are some of the primary beneficiaries of consumers’ free-wheeling spending on summer entertainment.
Cineplex’s push to capitalize on towering margins
Cineplex is the largest movie exhibitor in Canada, operating 1500 movie screens that serve 70 million guests annually. The company’s income is derived from two main sources: box office revenue, representing roughly 60% of total sales, and concession revenue, representing approximately 30% of total sales. The remaining 10% of revenue comes from various activities, including selling advertising time and space and operating gaming consoles in theatres.
Cineplex enjoys remarkably high operating margins on the sale of movie tickets and concessions. Before accounting for fixed costs, such as rent and capital improvement, close to 50% of every dollar spent on movie tickets and 80% of every dollar spent on concessions represents profit for Cineplex.
With limited variability in film and concession costs, and predictable rent and capital expenditures in the short-term, Cineplex’s annual profit is largely a function of movie attendance. The high margins on the sale of theatre tickets and concessions mean that Cineplex’s business succeeds when the public attends movies.
In a record-setting 2012, attendance at Cineplex theatres increased by 8% over 2011, resulting in double digit increases in box office and concession revenue. The revenue and attendance increases were largely a result of Cineplex bringing on line new theatres through acquisitions and capital upgrades.
In 2013 Cineplex has continued its expansion. This past June Cineplex entered an agreement to purchase 26 theatres from its chief Canadian rival, Empire Theatres, and opened for business newly renovated theatres in Toronto, Saskatoon and Vancouver.
Cineplex trades at a price-to-earnings multiple of 20, well below the industry average of 28. With consistent dividends in the last eight quarters, stable increases in the stock price over the past 5 years, and a beta of 0.14, Cineplex has the markings of a low-risk, low-reward stock. However, the company’s strong 2012 performance and active expansion in 2013 suggest the possibility for steady upside from this relatively cheap stock.
IMAX looks abroad to revitalize its core business
IMAX participates in more facets of the movie industry than Cineplex. It is the world’s largest designer and manufacturer of premium projection and sound equipment for movie theatres and derives its income from three primary activities: 1) selling and servicing patented IMAX projection systems; 2) producing, distributing and exhibiting films; and 3) revenue sharing agreements with movie exhibitors using IMAX theatre systems.
With a beta of 1.6, IMAX stock is considerably more volatile than Cineplex, but has also appreciated in value more significantly than Cineplex. After tripling in price in the last five years, the stock now trades a price-to-earnings multiple of 40.
In 2012 IMAX experienced a significant shift in its revenue. The company’s traditional core business – the sale of IMAX projection systems – fell by 10%, while revenue from film production and distribution increased by over 30%.
Intent on maintaining strength in its traditional core market, in 2013 IMAX has pursued sales of its projection systems in international markets. While less than half of the IMAX systems currently in operation are located outside of Canada and the U.S., IMAX expects that ratio to change significantly in the coming years. In June, IMAX announced the expansion of an agreement with CJ CGV Holdings for the installation of 95 IMAX theatres across China and South Korea.
Regal struggles at the box office
Regal Entertainment operates the largest movie theatre circuit in the U.S., consisting of more than 7,000 screens in over 500 theatres.
Like Cineplex, Regal derives the majority of its income from box office and concession sales, on which the company has robust margins of 50% and 85% respectively. However, unlike Cineplex, Regal’s attendance figures are trending downward. From annual attendance figures over 240 million in 2008 and 2009, annual attendance at Regal’s theatres fell to less than 220 million in 2010, 2011 and 2012.
Mostly as a result of price increases, Regal now generates higher revenue per customer than it did in 2009, however, with decreased attendance, the company recorded less revenue in 2012 than it did in 2009.
Reflecting investor concern over weak attendance and revenue figures, Regal’s stock has underperformed the industry in general and IMAX and Cineplex in particular over the last five years. On account of limited investor confidence in future growth, the company trades at a price-to-sales ratio of 1, well below IMAX’s price-to-sales ratio of 7 and Cineplex’s ratio of 3. However, by valuation metric focused on profit, in spite of the stock’s weak recent performance, it is still relatively expensive: Regal trades at a price-to-earnings multiple of 25, a sizeable premium over Cineplex.
Two thumbs up for Cineplex
At a steep earnings discount to its competitors, Cineplex is a worthwhile investment. By purchasing stock in Cineplex, an investor gains a stake in a stable, dividend-producing company that is engaged in organic and acquisition-fueled expansion that can take the stock new heights.
The great ideas don’t stop here
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Fool contributor Colin Tweel does not owns shares in any of the company’s mentioned. The Motley Fool owns shares of Imax.
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