Fourth Quarter Box Office Preview

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Earlier today, I provided a brief wrap-up of the excellent third quarter performance of the box office which rose at least 15%. Looking ahead to the fourth quarter of 2007, the comparison looks fairly easy although the lack of obvious mega blockbusters suggests only a moderate low to mid-single digit gain. For example, admissions revenue at Regal Entertainment is expected up in the mid single digits in the fourth quarter.
Last year in the fourth quarter, the domestic box office grossed $2.2 billion, unchanged vs. 2005. In fact, the fourth quarter box office has not grown since 2004. According to data compiled by Lehman Brothers and BoxOfficeMojo.com, there were seven films released in 4Q06 which grossed over $100 million, led by Night at the Museum with $250 million and Happy Feet with $187 million. In 2006, just 6 films crossed $100 million, while 2004 saw 10 films reach so-called blockbuster status.
Box office pundits expect 8 or 9 films to cross $100 million this year. However, there are no obvious home runs such as the big summer sequels with their built in audience. Among the most anticipated films form a box office perspective are The Golden Compass and I am Legend from Warner Brothers, The Bee Movie from Dreamworks Animation via distribution by Paramount, and National Treasure 2 from Disney.
For theatre stocks like Regal Entertainment, Carmike Cinemas, and Cinemark Holdings, the overall box office performance is a key factor driving the stocks. In theatre advertising company National Cinemedia is also sensitive to weekly box office trends. While I think that easy comparisons should lead to an up fourth quarter for the first time in several years, it does not look to me like there is much hope for a meaningful year-over-year increase. Coming off the big summer, momentum will slow significantly, something which is likely to occur again in 2008 as comparisons get really tough starting in May. Strong third quarter earnings reports and the potential for more dividend hikes, share buybacks, and special dividends, should provide near-term support for the theatre stocks but I am not as optimistic as I was earlier this year when I anticipated the big summer. Although it trades at a slight premium to its peers, I still like Regal Entertainment the best given its current yield of over 5% and the company’s history of giving excess cash to shareholders via special dividends.
On the studio front, the key thing to watch is how this year’s releases line up against the prior year. I see Disney, Viacom (Paramount), and Lionsgate as having the most favorable comparisons. Time Warner (Warner Brothers and New Line) and General Electric have neutral comparisons, while Sony and News Corp (20th Century Fox) have the toughest comparisons. Below are comments on Disney, Viacom, Time Warner, News Corporation on Lionsgate fourth quarter studio outlooks. I left off General Electric and Sony since those companies other business dwarf their studios…..

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Third Quarter Box Office Is A Blockbuster

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The final totals are in on the third quarter box office and as I have chronicled the results are spectacular. According to data I pull from BoxOfficeMojo.com, the box office rose 15% in the third quarter. My spreadsheet goes back to 2004 and that is by far the best comparison for any quarter.
The strength was driven by blockbusters. Five films released since May 4th have grossed between $290 million and $336 million. Four of those films are over $300 million, a level now reached by just 26 films ever. A total of 17 films released since May 4th have grossed over $100 million. By contrast, in 2006, there were just 11 films released in the summer season that grossed over $100 million.
The 3Q strength this year was similarly built on blockbuster releases. In 2006, just 3 of the 11 $100 million summer movies were released on after the last weekend of June. This year 10 films released in the same period grossed over $100 million including Transformers ($315 million, #3 this year, #20 all-time) and Harry Potter and the Goblet of Fire ($290 million, #5 this year, #30 all-time, and #2 of the five Potter films so far).
For theater companies, the news is all good….

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October 2007 Model Signals

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There are no changes to the signals from Northlake’s Market Cap and Style models for October. The market cap model continues to flash a strong signal in favor of large cap outperformance. The style model is now flashing its strongest signal since the late 1999/early 2000 market peak for growth stocks. To capitalize on the signals, I continue to own the S&P 500 (SPY) and the Russell 1000 Growth (IWF) in client and personal accounts.
The market cap model did undergo a slight shift toward small caps as two of the ten factors went form a large cap signal to a small cap signal. Advisory Service Sentiment got extremely negative and then turned up in the past two months. This is normally bullish for small caps. In addition, consumer confidence has fallen to a level that favors small caps. This is a contrarian indicator. The concept is that low consumer confidence leads to the next move by the Fed or in the economy being favorable to investors. If so, why not own beta. Low and falling consumer confidence also often leads to falling interest rates. Falling interest rates are one of the strongest indicators of small cap outperformance. I still expect the large cap signal to hold for another month or two at least but the model suggests that outperformance of large caps may moderate.
And large caps have been outperforming. Since the current large cap signal went into place on February 1st, SPY is up 6% while the Russell 2000 as measured by IWM is up less than 1%. In the third quarter, SPY rose 1.5% while IWM fell over 3%. Even as the market rallied sharply in September, SPY was king, rising 3.4% vs. 1.6% for IWM.
As mentioned the Style model now has its strongest reading and its longest string of growth readings since the period from August 1999 though March 2000. The only change to the underlying factors for October was a shift in the insider activity indicator from value to neutral.
Since growth signal went into place in June, the Russell 1000 Growth (IWF) is up over 4% vs. a loss of almost 1% for the Russell 1000 Value (IWD)…..

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Ukraine Elections Positive For Central European Media Enterprises

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Ukraine held elections for the third time in four years over the weekend. The pro-Western block of parties that originally formed the Orange Revolution were the surprise winners by a slight margin. Former Prime Minster Yulia Tymoshenko’s party produced the upside surprise bringing in over 30% of the vote, possibly coming in first place. With current President and coalition partner Victor Yushchenko’s party bringing home low to mid-teens support, the Orange coalition should be able to produce majority government and appoint Yulia Prime Minister.
Heading into the elections many observers thought current Prime Minister Victor Yanukovych would be forming the next government with his pro-Russian communist allies. Yanukovych’s party may still take home the most votes but he will be unable to form a majority coalition. How he and his supporters react will determine whether Ukraine will finally have a stable coalition government.
The outcome of this election is important to Central European Media Enterprises…..

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