05.13.09
Potter and Spock vs. The Recession
The movie industry has been a rare bright spot amid the economic downturn. Another summer of potential hits, such as new 'Star Trek' and 'Harry Potter' films, should keep the trend going.
By Michael Brush
MSN Money
Despite the dire forecasts, this recession isn't the Great Depression, except in one sense: Movies are again providing a Great Escape from grim reality.
As I had forecast last year, recession-weary Americans are filling darkened theaters to hide from the gloom and doom, just as they did during the 1930s. That's made the film industry a rare bright spot in this economy.
The industry's total box office was up 1.5% last year despite the economy's slowdown, and people started heading to the theaters in droves this year as things turned really bad:
• Though retail spending fell 10% in the first quarter of 2009 compared with a year earlier, consumers shelled out 10% more to see movies in theaters.
• Movie spending was up 14% for 2009 through early May, compared with the same period in 2008, as fans flooded the theaters to lose themselves in hits such as "Monsters vs. Aliens," "Fast and Furious" and "X-Men Origins: Wolverine."
The $76.5 million opening of a new "Star Trek" adventure last weekend kicked the summer movie season into warp drive. And the trend will probably continue as film buffs enjoy potential mega-hits featuring the likes of Harry Potter and the Terminator.
"I think the summer lineup is terrific," says Michael Burns, the vice chairman of Lions Gate Entertainment. "It is just crazy-crowded."
"There's no obvious weak spot where you can say, 'That's going to be down weekend,'" agrees Jeff Blake, the head of Columbia TriStar Motion Picture Group's marketing and distribution at Sony (SNE, news, msgs). Sony's big film this summer, "Angels & Demons," a prequel to "The Da Vinci Code," will open May 15.
The Imax magic
One focus this summer will be on new technology. More theaters are using digital versions of films that are sharper and don't wear and allow for better 3-D. Fans love the technology. About 60% of the $180 million-plus spent on tickets to "Monsters vs. Aliens" was for the 3-D version, according to the National Association of Theatre Owners.
This could make a big winner out of Imax (IMAX, news, msgs), whose technology immerses viewers fully in movies with bigger screens and sound. Imax films have been taking a disproportionate share of the box office, even though tickets cost a bit more.
Imax picked up around 10% of the box office on its versions of the hit films "Watchmen" and "Monsters vs. Aliens," even though it had only around 2% of the screens.
And Imax is poised for more growth. It's aggressively converting screening rooms to its format in joint ventures with multiplex theater chains. It plans to have 250 of them by 2011, up from around 80. Imax currently has about 350 screens overall.
Movie stocks
Can big hits lift stocks? Yes. Consider the all-time highs for Marvel Entertainment (MVL, news, msgs) after its big hit with "Iron Man" last summer.
But investing on these trends is trickier than slipping into a darkened theater to forget about your problems.
Many film studios are nestled inside media giants such as News Corp.Time Warner, Viacom and Walt Disney, which have problems a hit alone can't fix. They face the challenges of severe weakness in other media businesses and slowing DVD sales.
Despite these challenges, many of these stocks have run up considerably in the past two months as hopes for an economic rebound have swelled. So to buy these stocks now, you need to have a time horizon of a year or more.
Or, like entertainment sector investing expert Larry Haverty, you have to believe a decent economic rebound really is in the works. Haverty manages the Gabelli Global Multimedia Trust, a closed-end mutual fund. "I'm pretty optimistic," Haverty says. "We still think the stocks are very cheap."
Haverty likes News Corp., Time Warner and Viacom at their current levels. But he's cautious on Disney.
In my opinion, Lions Gate Entertainment looks cheap right now at about $5. But I'd wait for a pullback in DreamWorks Animation to below $20.
Marvel Entertainment, last year's big stock winner in this group, is having success now thanks to "X-Men." But it may stall out because its next big movie, "Iron Man 2," is not due out until May 2010.
Here's a look at the big summer movies and how they may help the companies behind them.
Hit Parade:
"Star Trek," opened May 8
The new "Star Trek" movie proves that an old TV series can live long and prosper. This movie beams Trekkies back to the U.S.S. Enterprise's maiden voyage.
But it may not even be the biggest summer hit from Viacom's Paramount Pictures, which has "Transformers: Revenge of the Fallen" waiting in line. The sequel, produced with DreamWorks and based on a Hasbro toy line, will open June 24. BMO Capital Markets thinks the film could gross $400 million.
Paramount has another potential hit in a film called "G.I. Joe: The Rise of Cobra." And it's the distributor of "Monsters vs. Aliens," also made with DreamWorks.
All of this means Paramount will have a great summer -- one reason Haverty thinks Viacom's stock will climb. A risk here is that Viacom's cable advertising is falling faster than at its peers', with its flagship MTV channel especially weak. Goldman Sachs Group analyst Mark Wienkes has a $24-a-share price target on Viacom, which recently traded for $21.
Imax could also get a boost from "Transformers" because director Michael Bay used Imax film equipment to shoot three scenes especially for the Imax version.
"Angels & Demons," opening May 15
In this prequel to "The Da Vinci Code," Tom Hanks returns as Harvard religion expert Robert Langdon to battle wits with an ancient force -- a secret society known as the Illuminati -- that threatens to destroy Vatican City. "Angels & Demons" could gross $250 million at the box office, according to BMO Capital Markets.
The movie comes from Sony's Columbia TriStar, which also looks for a hit with a remake of "The Taking of Pelham 1 2 3," due out June 6, and several other films. These movies will join a deep and profitable film library at Sony, which also has a big consumer-electronics money machine in the PlayStation gaming platform. Despite these positives, problems controlling costs and consumer weakness make Morningstar analyst Michael Holt cautious on Sony stock.
"Night at the Museum: Battle of the Smithsonian," opening May 22
Ben Stiller will return as an unfortunate museum watchman who contends with exhibits that come to life at night in this sequel. BMO Capital Markets analysts think the film could take in up to $250 million.
The movie is from News Corp.'s 20th Century Fox film division. Fox also distributed "X-Men Origins: Wolverine," a May 1 prequel to the X-Men film trilogy based on a Marvel Comics character. It has already taken in more than $178 million.
Fox is also releasing "Ice Age: Dawn of the Dinosaurs," on July 1, another in its line of computer-animated "Ice Age" films for kids.
News Corp. recently posted weak results in its television and newspaper divisions. But its cable networks held up. So did films, and the growth here should continue, a trend Haverty expects will help lift the stock. "Fox will have a phenomenal profit surge in the next 18 months," he says. "The stock is very cheap.
"Up," opening May 29
The latest from Disney's Pixar Animation Studios features an irascible old dude who dodges a move to assisted living by tying helium balloons to his home and flying away. He's got an 8-year-old stowaway, and the two battle beasts and villains whenever they touch down.
Disney has been battling weak results in its film division. Haverty thinks "Up" could come up short and prolong the negative trend in Disney's studio revenue. Its theme-park and television divisions are also weak. So Haverty is avoiding the stock. Morgan Stanley analyst Benjamin Swinburne has a price target of $21 on Disney stock, which recently sold for $25.
"Harry Potter and the Half-Blood Prince," opening July 15
Harry Potter will return to battle the evil Lord Voldemort, who has tightened his grip on the Muggle and Wizard worlds. Potter is older now, so he struggles to control a new kind of magic: Teen hormones rage, and love is in the air.
Time Warner's Warner Bros. is behind this film, the sixth movie in a franchise based on the fantastically popular novels by J.K. Rowling.
Warner Bros. could have another big hit this season in "Terminator Salvation," due out May 22. Arnold Schwarzenegger kept his day job as governor of California, so the fourth film in the series features Christian Bale battling robot overlords. Warner Bros. could also get traction this summer with "The Hangover," a June 5 release about a Las Vegas bachelor party gone awry.
Now that Time Warner has spun out its cable division, hit movies have a bigger impact on earnings at the company, says Robert Routh, an entertainment sector analyst with Wedge Partners. So these movies will provide a boost. Strength at Time Warner's cable networks, particularly HBO and the Turner system, could also help drive the stock higher. One problem is that subscription revenue at the company's AOL division is in free fall.
"I Can Do Bad All by Myself," opening Sept. 11
The latest Tyler Perry film from Lions Gate is based on Perry's first stage play to star Madea, his popular comedy character. Perry's "Madea Goes to Jail" has pulled in $90 million since it opened in February, suggesting what Lions Gate might expect from the new Perry film.
Lions Gate's slate also includes a film about basketball star LeBron James called "More Than a Game," due out in October, and one that carries the blessings of Oprah Winfrey called "Push," about a struggling young black woman.
Unlike many of the entertainment stocks, Lions Gate hasn't rallied since early March. So it looks like a buy, especially because the company generates revenue from a huge film library. It's also big in TV with "Mad Men," "Weeds" and other popular shows.
It may not have a traditional blockbuster in the lineup, but Oprah's about as close to a superhero as you'll find in real life.
At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.
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