On Black Friday, Invest in Movies instead of the Mall?

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Long lines at midnight. The threat of being sold out. Warnings of strikes.

Movie theaters probably won't have to worry about any of these on Friday.

And yet, despite the weekend's relative quiet, the film industry historically sees some of its highest sales figures around this time of year. With all these dollar signs flying around, it's natural for a potential investor to want to get in on some of the action. But are these companies' financial prospects truly fruitful, or little more than movie magic?

Production Companies
It's not hard to think of a recent hit from Lionsgate Films (NYSE: LGF  ) . In fact, it might be harder to get away from them. This movie house has birthed such unavoidable franchises as Twilight, Saw, and The Expendables, also known as the film with every action hero you've ever seen. Not surprisingly, that movie was Lionsgate's most profitable ever, according to their website. 

With all these hits, Lionsgate has had no problem maintaining huge revenues. In 2011, it saw sales of $1.5 billion dollars, up 1% from the previous year. However, look farther down the income statement, and the situation appears less rosy. Cost of production is a killer for Lionsgate, and most of the leftover money was dwindled away in advertising, leaving net losses of at least $30 million for three years in a row. If the company continues in this pattern, it won't have enough capital to stay afloat, much less reward investors.

A production company that is a branch of a greater whole, like Disney (NYSE: DIS  ) , appears to have more of a chance for success. Even in the quarter of notorious flop John Carter, which lost $200 million in June, Disney's quarterly net income stayed well above $1 billion, and its P/E, a rational 15.51, compared to an industry average of 17. Even Disney sees its share of turkeys but, thanks to diversification, they aren't as crippling as they could be.

Production companies might not get huge rewards from high revenues, but do the movie theaters themselves? Yes, if your name is Cinemark (NYSE: CNK  ) . This movie theater distributor has lately seen revenues well into the $2 billion range, up 6% from the last year. While competitor Regal Cinemas (NYSE: RGC  ) brings in higher revenues, Cinemark's net income for last year was over four times larger than Regal's. Meanwhile, Cinemark's P/E of 18.75 suggests undervaluation, especially next to Regal's 21.22, and the industry's mean of 30.

Also intriguing is IMAX (NYSE: IMAX  ) , which primarily makes money from providing its giant-screen services to other theaters. But, while it might look exciting, there may be cracks in this company's veneer. IMAX's sales dropped 4% in 2011, and its revenues pale in comparison to Cinemark's and Regal's, taking in only $230 million net revenue compared to these theater chains' respective $1 billion and $2 billion. IMAX's P/E is also astronomical -- in an industry averaging 16.94, it clocks in at 42.52. That huge screen might be breathtaking, but it might take some time before IMAX's financials match the product.

Are these blockbuster stocks, or just busted?
As it turns out, a string of smash hits doesn't guarantee financial success for the related companies. However, Cinemark and Disney are two businesses that have maintained stability for their investors. Should you choose to put your money in movie stocks instead of tickets, consider investing in these solid companies.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 25, 2012, at 9:12 AM, retiredarmyjor wrote:

    Caroline's quick overview of LGF leaves out that their EPS last quarter was 56 cents on revenue of 707 million. The street was looking for 9 cents and 622 million. Her statement "If the company continues this pattern, it won't have enough capital to stay afloat, much less reward investors" is baseless. The pattern - acquistion of Summit Entertainment, success on the small screen, record DVD & digital sales is a GOOD pattern. As far as productions costs increasing, BDP2 costs 120 million vs 110 for BDP1 and its international gross during opening weekend was 340 million - does this really look like a company that "can't stay afloat"?

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