Days after one Wall Street analyst told investors to sell their movie theater company stocks, another now says it’s a good time to buy. “After a rough 2014, we see a bright outlook for the industry,” RBC Capital Markets’ Leo Kulp says in a report initiating coverage of exhibition.
With execs preparing to converge on Las Vegas for next week’s CinemaCon convention, he says that Regal, Carmike, and Cinemark shares should grow more than the overall market, and AMC — whose stock has been on a tear over the last several months — will stay in line.
One reason for his optimism: An RBC survey shows that consumers like theaters that upgrade their seating and concessions, and offer alternative content on slow nights. Although 44% of the 1,000 respondents didn’t have a favorite theater chain, 24% cited AMC which Kulp says “is due to their focus on improving the customer experience.”
The No. 2 chain was followed by industry leader Regal with 15% and Cinemark with 9% — numbers slightly below their share of nation’s screens — and Carmike with 6%.
The analyst zeroed in on 57% of respondents who go to three or fewer movies a year. About 44% of them said that they had been to a theater with cushy recliner seats. More than half of those who had said that the upgrades made them more inclined to return. An increase in ticket buying from this group “would likely have a meaningful impact on industry attendance, which averaged ~4x per person in 2014,” Kulp says. “With regards to pricing, 42% of respondents would pay $1+ extra for a premium seat.”
Theaters also can boost attendance by swapping out Hollywood films on slow nights in favor of alternative content — including live events, classic films, multi-cultural content, and TV fare. “Our survey suggests that a sizable number of respondents are interested in alternative content,” he says. “Increased attendance from such events would likely be very high margin given the high fixed costs and relatively low utilization rates of theaters.”
Finally, the analyst believes that exhibition is due for a lot of dealmaking in a period when buyers can take advantage of low interest rates and sellers benefit from high valuations. The Big 4 circuits are buying smaller ones. Some overseas companies including Shanghai Film Group, Alibaba, South Korea’s CJ Group, and Latin America’s Cinepolis also may want to gain a foothold in the U.S., following Wanda Group’s acquisition of AMC.