Shaking Up the Movie Industry

The movie industry could be about to change in a big way, and one company is in front of the trend.

May 21, 2014 at 11:04AM

DreamWorks Animation's (NASDAQ:DWA) CEO has come out and said that "movies are not a growth business." This alone should get investors worried about the movie market. However, the CEO's other comments that he made at the Milken Institute Global Conference from last month are even more troubling.

The big issue for the movie industry
DreamWorks is a film studio that produces computer generated animated features, with key franchises that include Shrek and Kung Fu Panda. And at the Milken Institute Global Conference, DreamWorks' CEO, Jeffrey Katzenberg, said that he believes the industry is moving toward having movies in theaters for only a short time period. His vision is that movies will be in theaters for three weeks, with tickets costing $15. Then they'll run on TV for $4.99 and smartphones for $1.99.

As a result, DreamWorks is focusing on short-form video, which includes turning its gaze toward TV, and is expanding its partnership with Netflix. Recently, DreamWorks posted earnings that came in well below estimates and the stock is now down over 30% year to date. The big miss came as DreamWorks had a large writedown on the Turbo movie. But this could be an enticing buying opportunity for investors looking for a play on the animated film space.

How DreamWorks is hedging itself
Last year, DreamWorks inked a multi-year deal with Netflix for TV licensing. It also recently acquired Classic Media and Awesomeness TV, which are all part of its plan to increase its TV offerings. DreamWorks pulled in $100 million last year from TV-related content, and it expects that number to double to $200 million by 2015.

That's a pretty big deal considering DreamWorks only generated $720 million in revenue over the last twelve months. Other potential growth drivers for the company includes partnerships with theme parks and cruise ships. The company is having success there too, and its revenue from non-film related sales accounted for 24% of its top line last year.  

Movie theaters could be hit the hardest
Regal Entertainment (NYSE:RGC) is one of the key theaters that could feel the pain from a shift in how new movies are released. Luckily for Regal, it's the largest movie theater company in the U.S., operating 7,400 cinema screens across 580 theaters.

Regal's results for the fourth quarter were weak mainly due to lackluster attendance. Regal has already completed its transformation to digital, which included adding 3D screens to its theaters. That means there might be little Regal can do in the near-term to attract more movie-goers. One strategy that movie theaters might try is mergers and acquisitions. By consolidating, they might be able to hedge the decline in the industry a bit better.

It's also worth mentioning that Regal owns a near 20% stake in National CineMedia. This company is a joint venture with other theater operators, which focuses on in-theater advertising. However, the cash that Regal brings in from this segment is still less than 10% of total revenue.

Technology in theaters will also feel the pain
IMAX (NYSE:IMAX) is heavily tied to the movie theater industry. IMAX gets over 65% of its revenue from IMAX theater systems, while another 35% comes from film production. However, on the theater front, IMAX did manage to sign up 35 new theaters during the first quarter. It only added 17 during the first quarter of last year.

IMAX is getting more active in filmmaking to help diversify its revenue. This includes developing local language films outside the U.S. Last year, IMAX helped developed nine films in local languages spread across China, France, India, Russia, and Japan. More deals like these will help take the relief off a potential decline in theater traffic. But on a positive note, 3D theater screens have a low penetration rate overseas, namely in Europe, where IMAX recently announced a deal will allow it to start opening IMAX theaters in the region next year. This could be a growth opportunity for the company. . 

How shares stack up
DreamWorks trades at a P/E of 17.5 based on next year's earnings estimates. Its debt-to-equity ratio is just 20%. IMAX's P/E is above DreamWorks at 21, but it doesn't have any debt. Regal trades at the lowest P/E, coming in at 14.

Regal carries a hefty debt load, its debt is $2.3 billion while it only has a $2.9 billion market cap. Compare that to DreamWorks, which has $300 million in debt and a $2 billion market cap. However, investors of Regal do get a hefty 4.7% dividend yield, while neither DreamWorks nor IMAX pay a dividend.

Bottom line
The movie industry is due for a change. It'll be a lot easier for the likes of DreamWorks and IMAX to navigate a change on how movies are played in theaters, than Regal and its peers. IMAX will also be pressured if DreamWorks' expectations come true. For investors looking for exposure to the animated space, DreamWorks is worth a closer look. 

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation and Imax. The Motley Fool owns shares of Imax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers