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. 

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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.

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