Tenet, the movie expected to kick off Hollywood’s long-deferred summer, has a “low likelihood” of being released in August, according to a veteran exhibition analyst.
Additional delays of the movie re-start will put further strain on theater circuits’ balance sheets and put 2020 box office on a path toward 70% decline from 2019 levels, Eric Handler of MKM Partners predicts.
Handler lowered his outlook on several exhibition stocks in a note to clients Monday, trimming his 12-month price targets for the stocks of AMC, Cinemark, Imax Corp. and National CineMedia. He maintained a “buy” rating on Cinemark and Imax, with the others “neutral.”
Major exhibitors have been battling through a historic months-long shutdown of theaters due to COVID-19. While many states attempted to reopen their economies in May and June, health data now indicate that was too soon. Florida set a single-day record for new infections over the weekend and rates have been surging across much of the U.S. Texas and California are other populous states experiencing major problems.
Tenet, a much-anticipated Warner Bros release directed by Christopher Nolan, along with Disney’s Mulan and other Hollywood tentpoles, have implemented multiple delays as they ride out the storm. In the case of Tenet, pricey TV ads have been touting the August 12 release as the studio tries to keep it top of mind for would-be ticket buyers. Studios and theaters are caught in a paradox, with no theaters able to fully operate without new product, but no studios willing to be guinea pigs as conditions deteriorate. It is also increasingly clear that indoor spaces are among the most likely places for disease to spread, though theater chains say mask policies, intense cleaning procedures and limited density counters the risk.
“The near-term outlook for exhibition related stocks remains extremely clouded,” Handler wrote. “It would be surprising to see theaters able to re-open nationwide before September, at the earliest.”
Handler now expects box office in 2020 to decline by nearly 70% from the $11.4 billion taken in during 2019, which was the second-highest tally in history. That would be worse than the 55% to 60% plunge he had previously forecast. There will also be a knock-on effect for Europe and other global territories where Hollywood titles play, even though theaters in many international pockets have successfully reopened in recent weeks.
“Beyond this year, we do believe there is pent up demand for consumers to get out of their houses for entertainment although the ramp up in attendance will likely be gradual,” Handler wrote. He is projecting domestic box office of $9.1 billion in 2021, still well below recent levels, but a “back to normal” 2022, with $11.5 billion.
New scrutiny will be applied to the balance sheets of exhibitors during the rest of the summer, especially their ability to endure a lengthy period of time without any revenue coming in.
“With box office revenue likely remaining at a near-zero level well into the third quarter, focus is once again shifting towards liquidity and cash burn,” Handler wrote, noting that those topics will be the key focus of upcoming second-quarter earnings calls in the sector.
AMC, despite its recent lifeline from a new debt raise, which boosted its shares in the pre-market Monday, is the most vulnerable company in the sector, in Handler’s view.
“Although AMC now has some breathing room, it remains highly levered and still pays a significant amount of interest expense while its FCF generation ability continues to be questionable,” he wrote.