Deep Stock Analysis: Movie Business Update

This biweekly newsletter lists key events in the movie rental and exhibition industries for the period between September 10 and September 23, including notable rental releases, box office figures and recent company-specific news.

Movie Rental Industry

Key Redbox releases this year (with domestic box office total in millions from www.boxofficemojo.com):

o 9/11: What to Expect When You’re Expecting ($41).

o 9/18: The Cabin in the Woods ($42).

Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):

o 9/13: Thor ($181), Something Borrowed ($39), Jane Eyre ($11).

o 9/20: Win Win ($10).

*estimated release date, **was originally slated for 8/21 but released on 8/28 according to www.redbox.com

Over the next two weeks, there is one notable rental release compared to one last year (notable releases are those that grossed over $50 million in domestic box office). We expect the upcoming two-week period to underperform the same period last year, as Battleship ($65 million in domestic box office) earned well below last year’s release, Transformers: Dark of the Moon($351 million). Additionally, it appears that the DVD release dates have been delayed for The Avengers and Dark Shadows.

We expect Coinstar (NASDAQ:CSTR) shares to be range-bound until pricing and features for Redbox Instant by Verizon (NYSE:VZ) are shared with investors. Investors still have no information about pricing and features, although Verizon said last week that the service will debut in time for the holidays, so we expect further details soon. Increasing streaming competition — from Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX), among others — limits the opportunity, in our view, and we think that potentially steep capital contributions could pressure Coinstar shares. We continue to believe that the recently completed NCR acquisition will be accretive by next year (roughly $0.50/share given 2,500 – 2,900 kiosk guidance), and believe that Coinstar’s coffee kiosks could generate as much as $0.65/share when fully penetrated. On balance, we would remain on the sidelines until details of the Verizon plan are announced.

Amazon recently announced a new partnership with EPIX, just as Netflix’s exclusive two-year deal expired. We estimate that EPIX content constitutes approximately half of the new feature film content (eight years and younger) offered by Netflix. The addition of costly EPIX content signals to us that Amazon is one step closer to offering a subscription service of its own, and makes Amazon’s offering competitive with Netflix. We expect Netflix shares to continue trending down, as we believe investors disappointed in Q2 domestic subscriber additions will again be disappointed in 2H domestic subscriber additions given unrealistic guidance and increasing competition. In our view, consensus estimates for domestic subscribers and earnings remain too high.

Exhibitor Industry

Domestic box office was down 7.5% in July. July began well, with late June releases performing above expectations. However, due to difficult comparisons and an otherwise soft summer release slate, July releases that performed in line with expectations, including The Amazing Spider-Man and Ice Age: Continental Drift, were unable to lift the comp to positive territory.

The Dark Knight Rises was the standout summer blockbuster as expected, but its success has been somewhat muted after the tragic events on its opening night. While we acknowledge the Colorado incident has certainly had an impact on ticket sales for TDKR, we believe that its box office run was longer as a result. Still, we believe a large number of moviegoers are content to watch in the safety of their homes during the rental window, in which case Redbox will be a clear beneficiary.

Domestic box office was down 9.9% in August due to cannibalization from the Olympics and a generally weak box office. We had expected moviegoers to head back to the theaters in droves after the Olympics had concluded. However, the muted response to August releases indicates that moviegoers are content to wait for more compelling fare. In particular, August action remakes and sequels such as Total Recall, The Bourne Legacy and Expendables 2 all performed below expectations.

Quarter-to-date domestic box office is trending down 7.2%, well below our initial quarterly estimate of up 1.2%. We expected that after the Olympics, pent-up demand would drive higher receipts. However, late August releases were weak and September releases have not fared any better. Our expectation for Q3 box office of up 1.2% is overly bullish, and we expect Q3 to come in closer to down 7%. We will revise our Q3 estimates for our covered exhibitors after the Q3 box office ends for Regal (NYSE:RGC) on September 27 and for Carmike (NASDAQ:CKEC) and Cinemark (NYSE:CNK) on September 30. We expect Q3 box office for Regal to be slightly higher than for Carmike and Cinemark due to its earlier quarter, as end of June receipts were notably higher than the end of September.