Despite competitive pressures from new forms of digital media and streaming content, a trio of financial experts and MoneyShow.com contributors remain bullish on traditional movie theaters. Here's a look at two leading theater chains and a REIT with a focus on movie complexes.
George Putnam, The Turnaround Letter
AMC Entertainment Holdings (AMC) is the world's largest theater company, with over 1,000 movie theaters and 11,000 screens, including 179 IMAX locations, in 15 countries in North America and Europe.
The company was started in 1920 when three brothers purchased the Regent Theater in Kansas City, Missouri. AMC has launched a number of industry innovations including the first multiplex theater, the first online ticket service and the first all-reclining seat theater.
In the past two years, AMC made several major acquisitions, including Carmike Cinemas and Odeon/UCI Cinemas. In 2012, the company was acquired by China-based Dalian Wanda Group, followed by an initial public offering in 2013. Dalian Wanda currently holds a 58% equity interest and 81% of the voting power.
The shares are down 53% in the past year and trade roughly 20% below the IPO price of $18. Investors are concerned about rising competition from streaming services like Netflix (NFLX) and Amazon (AMZN) Prime, as well as planned premium video-on-demand, which potentially would allow viewers to watch new movies in their homes soon after they are released in theaters.
After this past summer's attendance fell to one of the lowest levels in decades, investors are questioning whether the downturn is cyclical, or more reflective of secular trends.
Creating further concern is whether AMC can successfully integrate its recent acquisitions which have led to a high debt level and tight cash flow. There is also some uncertainty about the intentions of Dalian Wanda.
AMC's outlook is much healthier than the market is giving it credit for. Despite the lackluster summer, the company's revenues, adjusted for the acquisitions, will likely be flat from a year ago. We think much of the recent box office weakness is due to the dull movie slate earlier in the year.
Viewers still respond enthusiastically to great movies. For example, this past fall Stephen King's It became the #1 horror movie of all time, and Beauty and the Beast grossed $1.3 billion.
AMC's theater upgrade program, which includes installing luxury recliners and offering surprisingly good food, alcoholic beverages and other amenities, is showing very promising results. The company is developing other initiatives, including better pricing and selling movie merchandise.
Management is focusing its cash flow on repaying down much of its elevated debt by 2019 as well as on high-return upgrade projects and repurchasing $100 million of its shares. To raise additional cash, AMC has an asset sale program underway and may do a partial IPO of its European business.
With no significant debt maturities until 2022, the company has considerable runway. At a low 7.2x estimated 2017 EBITDA and with a generous 5.6% dividend, AMC's shares could provide strong returns to investors.
Tim Plaehn, The Dividend Hunter
EPR Properties (EPR) is the real estate investment trust most aligned with the movie theater business. EPR Properties can be viewed as a niche REIT, which is focused on three distinct types of commercial properties. It has been a publicly traded REIT for over 20 years and was the first and remains the only focused on movie theater properties.
The movie theaters are now included in the company's Entertainment sector. The other two sectors are Recreation, which includes golf entertainment complexes, metropolitan ski areas, and waterparks; and Education, which consists of private schools, charter schools and early childhood education facilities.
Under development is EPR's Resorts World Catskills property where the Montreign Resort Casino is expected to open at the end of March 2018. A waterpark is also under development on the property with a forecast 2019 opening.
EPR operates as a net lease REIT, with all its properties run by third-party operators. The company grows primarily by developing build-to-suit properties that are pre-contracted. The result is a portfolio that remains 99% plus leased.
As of the 2017 third quarter, the Entertainment sector generated 43% of net operating income, Recreation produced 32% and Education chipped in 22%. The Catskills property will start generating meaningful income in the second half of 2018.
There is a belief that movie theaters are due for a revenue decline because much entertainment can now be streamed into the home or to smartphones. Recent facts don't bear out this belief.
The year 2016 was a record for movie ticket dollar sales and the final numbers for 2017 will come close to that. The number of tickets being sold is down, but theaters are moving to an expanded experience at the movies, including more comfortable seating and expanded food and drink offerings.
Over the last 25 years, box office revenues have grown by a 3.6% CAGR. EPR benefits from theater remodeling towards improving the customer experience. These remodels typically come with a new, higher lease rate contract.
For investors, EPR Properties pays monthly dividends and has increased the dividend by an average 7% over the last nine years. In January 2018 the company announced a 5.9% increase for this year's dividends.
The share price has dropped by one-third over the last year, which has pushed the current yield up to 7.6%. This is an attractive yield plus dividend growth REIT where the perception of future prospects is wrong. EPR Properties will continue to grow and reward investors.
Ian Wyatt, High Yield Wealth
Few companies can adapt in perpetuity. The business landscape is littered with the carcasses of former industry leaders and business titans that proved unadaptable: Woolworth, Kodak, Pan Am, Blockbuster, Tower Records, to name but a few.
Given the rise of Netflix (NFLX) and other movie-streaming services, is the old technology of movie delivery doomed? We refer specifically to movie theaters. Are they doomed, or can they adapt?
Based on price action last year, investor sentiment lists more to the former outcome. Shares of the largest cinema chains traded down in 2017. AMC Entertainment Holdings (AMC) led the sector to a lower plane. Its shares lost 54% of their value during the year.
Regal Entertainment Group (RGC) was the lone exception. It finished the year up 5.5%. Regal finished the year up only because British-based Cineworld Group announced in December that it would acquire Regal.
We have a depressed industry. But while prices are down, dividend yields are up. The value proposition is up, too. We see an opportunity to capture immediate high-yield income and future share-price appreciation. We believe the old-technology theater-delivery model works.
No theater is adapting better to the new reality than Cinemark Holdings (CNK) , the largest U.S.-based theater chain. It operates more than 500 theaters with nearly 6,000 screens in the United States and Latin America.
It continually makes money; it grows revenue. Growth is attributable largely to new theater openings. But opening new theaters isn't enough. The new establishments must be built to satisfy consumer demand. Consumers want more than a simple seat to view a large screen these days.
More customers demand a luxurious viewing experience. Cinemark has responded by increasing its recliner count to over 40% of its screens. Cinemark also offers the most 236 XD theaters throughout its global circuit.
The technology employs a larger screen with additional improvements in audio and digital projection. XD screens comprise only 4% of Cinemark's circuit, but they're a hit with customers.
Cinemark has also explored virtual reality options to engage customers beyond their theater seats. It recently decided to collaborate with The Void, a virtual reality specialist, for an in-theater immersive entertainment location at its Dallas flagship theater.
Concessions have always been an important revenue and earnings driver. Concessions accounted for 33% of Cinemark's annual revenue last year. Thirty-four percent of Cinemark theaters now offer alcoholic beverages, a traditionally high-margin offering. Nearly 60% of the theaters offer full-service and dine-in restaurants.
Connections, a new loyalty program, further ensures more moviegoers will consider Cinemark theaters first. Connections has attracted 6.5 million members worldwide in its 18-month existence.
Cinemark's new Movie Club offering, launched in this past November, gives subscribers access to one standard 2D movie ticket a month for an $8.99 monthly subscription fee. Users can buy additional tickets for the same $8.99 price, book and pick seats online with no extra fees and receive a 20% discount on concessions.
The average moviegoer purchases 5.3 tickets per year. The opportunity to drive increased visitation of even one to two more times per year would substantially grow the top and bottom lines. The movie business is a cyclical business. The year 2017 was a down year for movie releases.
Cinemark shares finished down 9% in 2017. The dividend yield finished up at 3.3%. The shares recently traded at only 15 times 2018 earnings per share estimate of $2.25. The five-year average is closer to 19, which we think Cinemark has proven it deserves.
-- This commentary was originally published Feb. 15