Thank goodness for Captain America, Thor, and The Incredible Hulk. The superheroes are leading a movie-industry recovery and creating opportunity in battered cinema stocks.
Marvel’s latest blockbuster, Avengers: Infinity War, last month delivered the biggest global box-office opening in history: US$630 million in its first weekend.
Still to open in China, Avengers: Infinity War could challenge the highest-grossing movie of all time, eclipsing Avatar, which raked in US$2.7 billion in 2009. Then there are booming sales of Avengers-related toys and other merchandise linked to Marvel’s superhero universe.
Marvel’s 19 movies since May 2008 have delivered US$15.4 billion in ticket sales worldwide, according to industry estimates. The well-reviewed Black Panther took US$1.3 billion and boosted interest in the Avengers.
Structural change might be hurting, the rise of video-streaming services such as Netflix, now a movie producer, is boosting competition with cinemas, but the good news is that 2018 is off to a cracking start, thanks to Black Panther and Avengers: Infinity Wars. The Star Wars spin-off on the Hans Solo character, Solo: a Star Wars Story, Deadpool 2, Incredibles 2, a new Jurassic Park movie, Ant-Man and the Wasp, and a reboot of the successful Ocean’s 8 franchise headline a long list of likely blockbusters.
It looks like 2018 will spark a much-needed recovery in movie-ticket sales. But the share market has not factored the potential short-term recovery into entertainment stocks. Or fully considered what the boom in middle-class consumption means for cinema consumption.
Marvel, for example, has cleverly introduced new characters to appeal to new markets. Industry analysts expect stronger ticket sales in Africa, for example, thanks to the success of the Black Panther character, who leads a fictional African nation with super technology.
Avengers: Infinity War is expected to boom in China and attract new audiences across South East Asia. Young people and their parents in Asia are being introduced to western-style movies through superheroes – and learning about them via movies rather than comic books.
Superheroes are an ideal conduit to bring entertainment to another two billion Asian consumers, who are expected to join the global middle class by 2030 on OECD estimates.
Global entertainment stocks
The Walt Disney Company (DIS:US) is the pick of the global movie stocks. The “House of Mouse” fell from a 52-week high of US$115 to US$99, in part due to the poor movie summer in 2017 and amid general weakness in US equities after soaring gains last year.
Disney is releasing several expected blockbusters this year through its Marvel and Star Wars franchises and Avengers: Infinity War should reassure analysts that superhero fatigue at the multiplex is not yet evident. The Marvel universe has plenty of juice left.
Long term, I like Disney’s formula: build a library of valuable characters, create blockbuster franchises around human or animated movies, merchandise them to death, build related theme parks or attractions – and repeat the franchise as often as the audience will allow. Disney also has the financial clout to invest billions to take on Netflix in video streaming.
At US$99, Disney is on a trailing Price Earnings (PE) ratio of 14 times – hardly demanding for a company of its quality with such strong intangible assets. An average share-price target of US$119, based on the consensus of 23 broking firms, implies the stock is undervalued.
Chart 1: The Walt Disney Company (DIS:US)
Source: Yahoo
Several larger investment banks have upgraded their Disney recommendation in recent weeks as they, like me, look towards a stronger summer movie season in the US this year.
Among cinema stocks, AMC Entertainment Holdings Inc (AMC:US) is an interesting play on ticket-sales recovery. AMC owns about 1,000 theatres in the US and internationally. The stock halved last year on awful movie attendances but is starting to recover.
Chart 2: AMC Entertainment Holdings (AMC:US)
Source: Yahoo
Local entertainment stocks
Event Hospitality and Entertainment (formerly Amalgamated Holdings), EVT, is the pick of ASX-listed entertainment stocks for portfolio investors.
The $2.2 billion company earns two thirds of its revenue from its cinema-entertainment business, a quarter from its hospitality and leisure division (largely through the Rydges chain) and the rest from the Thredbo Alpine Resort and other property investments.
Event’s hotel chain has a good outlook, as corporates cut travel costs by requiring managers to stay at four-star properties, such as Rydges. Strong growth in revenue per available room and margins helped offset weakness in the cinema unit.
If my view about a boom year for the box office is correct, Event could have two strong engines driving earnings growth. An average share-price target of $15.33, based on the consensus of four broking firms (too small to rely on) suggests Event is undervalued at the current $13.87.
I’m not as bullish as the consensus, but see Event delivering solid gains in FY18 as its entertainment division benefits from a bounce in box-office sales.
Chart 3: Event Hospitality and Entertainment (EVT)
Source: ASX
Among smaller entertainment stocks, Village Roadshow (VRL) has some appeal for contrarians. Village has almost halved from its 52-week high of $4.21, after a weaker-than-expected third-quarter profit update and guidance downgrade, released last month. Village shares have struggled since 2014.
Village’s theme parks and film-distribution business, as expected, weakened and the extent of the downturn in its cinema-exhibition division spooked the market. As movie sales improve this year, Village’s cinema business, worth over half of its earnings, should lift.
That might be enough to kickstart Village’s turnaround. The company has a relatively stretched (although improving) balance sheet and theme parks, film distribution and cinemas are fickle businesses. Thus, Village suits experienced investors who are comfortable with higher risk, small-cap turnaround situations.
Chart 4: Village Roadshow (VRL)
Source: ASX
- Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor All prices and analysis at May 2, 2018.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
