The Dow's surpassing lows not seen since early this decade, homes are in jeopardy, and retail sales are weak--yet the movie business continues to hold steady. Most industry sources report that admissions fell between 3 percent and 5 percent in 2008, which isn't too shabby considering the steep drop-off in consumer discretionary spending. Thank escapism for the 4.5 percent rise in theater admissions so far in 2009, says Eric Wold, Merriman Curhan Ford analyst: "Consumers still view the movie-going experience as a relatively inexpensive entertainment activity as well as an escape from the harsh economic realities," he wrote in a recent report. "Why else would Paul Blart: Mall Cop be the top movie two weekends in a row?" For investors, here are four cheap stocks that could benefit from consumers seeking lower-cost entertainment, and one to keep an eye on:
Dreamworks SKG (DWA). Dreamworks' specialty is computer-generated animated feature films, which include hits like Shrek and Madagascar. It's not a huge operation, however, as the company releases just a few films each year and a handful of television specials. In 2009, Dreamworks has only one theatrical release planned, Monsters vs. Aliens. But Wedbush Morgan Securities analyst Michael Pachter expects investor excitement to build later in the year in anticipation of three releases in the pipeline for 2010: How to Train Your Dragon, Shrek Goes Fourth, and Master Mind, "creating the potential for significant earnings growth in 2010," he says. Dreamworks' stock, recently $20, trades at 13 times analysts' 2009 consensus estimates. Pachter thinks the stock is worth $27.
Imax (IMAX). Not only are consumers willing to shell out $10 for movie tickets, they're also willing to pay a few bucks more for a "premium" experience, such as 3-D movies and IMAX films. IMAX, which plays Hollywood blockbusters, concerts, and 3-D movies on stories-high screens, operates roughly 350 screens and expects to have at least 100 more up and running by the end of the year. The company is also expanding internationally into countries like China and India, further expanding its reach. Wold thinks IMAX's growing screen count, upcoming movie openings, and increasing revenue share will drive sales this year. He sees potential for the stock, recently $4, reach the $14 to $16 range within the next 12 months.
Lions Gate Entertainment (LGF). This independent film and television distribution company, which is behind hits including Monster's Ball and the Academy Award-winning Crash, as well as the television shows Weeds and Madmen, reported dismal fiscal third-quarter results that sent investors fleeing. What's more, the company's shares plunged more than 30 percent after it lowered its projection for fiscal 2009 U.S. box-office sales. The culprit, Chief Executive Jon Feltheimer told analysts, is the "significant underperformance of our feature-film business." (Interestingly, billionaire investor Carl Icahn snatched up more than a million shares of the company following the earnings announcement, according to an SEC filing.) "Lionsgate simply must perform better at the box office," wrote Wunderlich Securities analyst Matthew Harrigan in a note to clients. He thinks Lions Gate's DVD sales are also an issue: although the company's horror and urban dramas are performing well, he says new releases can't afford to be sold as a loss. Harrigan recently downgraded the stock to a "hold," and lowered his price target for the stock to $5 from $10.25. Lions Gate shares recently traded at $4.
Marvel Entertainment (MVL). Although it's mainly known for comic books, Marvel also has a film studio that turns out superhero movies including blockbusters such as Iron Man and the Spider-Man franchise. The company has plenty more superhero stars to pick from, given its vast library of 5,000 characters. Since Marvel had just two theatrical releases in 2008, and has none scheduled in 2009, the company's results should be somewhat "lumpy," says Pachter. Since September, Marvel's stock has fallen off more than 30 percent, from $36 to $25 recently. But Pachter still thinks the stock is compelling, given its underappreciated earnings power in 2010 and beyond: "We expect Marvel's economics from film production to improve in 2010, due to lower debt balances...coupled with better terms with its license partners and distributor that will allow it to retain a greater share of future profits." Although Pachter recently lowered his target price last week to $31 from $36, he upgraded it to a "buy."
Regal Entertainment Group (RGC). Regal's sheer scale is a key strength: With more than 550 theaters in 39 states housing some 6,800 screens, it's the nation's largest theater operator. In its fourth-quarter earnings release last week, Regal reported a 30 percent rise in earnings, driven by a boost in admissions and concessions (as well as an extra week in the calendar year between Christmas and New Year's). But the company still missed analysts' expectations, sending shares down 9 percent. Although Regal recently cut its quarterly dividend--which usually a bad sign--Wold sees it as a positive, "proactive" move because it frees up more cash for Regal in this shaky credit environment and will allow it to decrease its debt balance. He thinks shares, recently $9, could reach $12.50 to $16 within a year.