Wall Street usually shows little love for the movie business with its typically low, and unpredictable, profit margins. But in a combined look at the studio and exhibition businesses this morning, MoffettNathanson Research’s Michael Nathanson and Robert Fishman tell investors that it’s time to take a fresh look — as long as they proceed with caution. They lowered profit estimates for major exhibition chains Regal and Cinemark, citing expectations for weaker domestic summer box office results vs 2013. They project a full-year decline of 1.6% to $10.7B followed by a 5% jump in 2015 to $11.3B and then a drop of 2.6% in 2016 to $11.0B. The analysts appeared more upbeat about the studios. “After several terrible years post the popping of the DVD bubble, we believe the film industry is showing signs of health,” they say. “The combination of fewer releases, greater international focus and lower overhead expenses are all driving studio margins ahead of pre-recession levels. These results show that a good crisis wasn’t wasted in Hollywood.” Revenues fell over the last few years at the big four film studios (Warner Bros, Disney, Fox, and Paramount) as they reduced their output. Yet cash flow margins improved to a little under 12% which is “a tribute to their ability to curb bloated studio expenses.”
The analysts are enthusiastic about the results from overseas which “meaningfully outpaces U.S. growth.” The four companies generated 55% of their box office revenues from abroad last year, up from 46.4% in 2009. Nathanson and Fishman also see stability in home entertainment, which they call “a key driver of industry profitability.” They expect little help from 3D, though. Films with the extra dimension accounted for about 161M domestic admissions last year, about 12% of the total, and probably won’t go much higher “until another movie can prove a differentiated experience to moviegoers (possibly Avatar 2).” The analysts add they they were surprised to hear, at the exhibition industry’s recent CinemaCon confab, that there “was talk about a slowdown for 3D box office internationally.” Overseas ticket buyers are becoming more selective about the movies they’re willing to pay extra to see in 3D, presenting “the same issues as in the U.S. in 2011.”
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