In this clip from Industry Focus: Consumer Goods, host Vincent Shen and contributor Asit Sharma discuss how badly AMC, Cinemark, and Regal Cinemas (NYSE: RGC) are doing, why the companies have been struggling as much as they have, why the market might be overreacting to the down trends in ticket sales by selling out of these companies so drastically, and why the movie industry probably still has a long life ahead of it.
A full transcript follows the video.
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This video was recorded on Aug. 15, 2017.
Vincent Shen: If we look past the studios, from more of an investing perspective, it's really interesting to see the box office down 4%, but three major theater chains are all in the red in terms of their share prices for 2017, some of them quite a bit so. Can you give us a quick rundown on what's going on with the big theater operators out there?
Asit Sharma: Sure. AMC, this is the one that's going to surprise everyone, it's down nearly 60% year to date. Of course, if you own it, that won't surprise you. You'll be familiar with that already. Cinemark down 18%, and the stock price of Regal Cinemas is down roughly 6%. I'd like to focus on AMC because, if you read the headlines about movie receipts and you're a shareholder and see the company has punched 60%, you might be tempted to say, "This is really pretty bad, this drop off in the box office receipts. What happens if we have a down here next year? Is my stock going to zero?" Let's dig in.
AMC has had an ambition to grow, and they've become the largest domestic theater operator. I think they're also, at this point, the world's largest theater operator. They've got now a thousand theaters with 11,000 screens in 15 countries. But they did this in large measure by making three major acquisitions over roughly the past year. One that our listeners will be familiar with is Carmike Cinemas. In making these acquisitions, AMC has leveraged its balance sheet. It's got now about $4.3 billion in debt. And that interest expense paying on that debt is part of the financial equation which propelled them to a $176 million loss last quarter. So a combination of lower receipts and this leverage is hurting maybe what is an over-ambitious chain for now.
I don't know, Vince, if you follow AMC or had a chance to look at this stock. What are your thoughts about this interplay between the receipts and what the company has done to become this leading theater operator? Is it worth it?
Shen: That's a tough one for me. If you're an investor in these theater operators, something you'll know, and if you're not, something you have to keep in mind is, is that you kind of fundamentally don't have as much control over the product that you're selling. The studios are the content creators and driving that part of the equation. But these companies, a lot of their bottom line comes from the perks that they sell you in terms of the concessions and in terms of the experience, whether it might be with 3D viewing, with IMAX, with premium seating or whatever it may be.
Another company, similar, that has struggled this year like AMC and is in a similar position is with IMAX (IMAX 1.10%), which is down 40% year-to-date, some of its lowest levels in the past five years. The company is laying off employees. Ultimately, they're similarly feeling the pain from the poor trends in the industry. For example, near-term headwinds like 3D losing its popularity, and the fact that revenue from 3D ticket sales, for example, has declined steadily from their high back in 2010, and in general, losing their share of box office revenue, at least domestically. A company like IMAX still depends on expanding into more theaters for growth. But then you have some of the operators like AMC looking to other perks like concessions, seating, as ways to bring in theater-goers, rather than upgrading their screens to IMAX. So there's all these different players here in this industry, and it's interesting to see how they deal with what, right now, is a 4% off year, but a very slow summer season. And that timing, I think, for AMC, has hurt them particularly, as you mentioned, as they've made these three large acquisitions.
But looking out further, I think we've had episodes in the past where we talked about competing entertainment alternatives, the fact that ticket sales do go down year after year, and a lot of people are ready to start writing the obituary, to an extent, on the idea of people going out to see movies. But, I think if you're even looking out 20 to 40 years, barring some crazy technological innovation in terms of how people consume movies, I think this is a long-term, sustainable business, and these theater operators and the contact creators, as well, will be able to adapt and make things work. A lot of people might think that theater operators, that their space is fading. But overall, they find their ways, whether it was through 3D or IMAX or other things like concessions, to bounce back and keep their growth going.
Sharma: Yeah. I just want to make one quick point, I think it's an excellent point and I just want to reiterate that, I also believe that over the long-term, this industry is going to continue to grow. They'll find ways, like the premium concessions, premium seating, to adapt. At the end of the day, it depends on the content, and that comes in waves. Sometimes the content is great and movie receipts are awesome for three years running, and sometimes you have an off year. But as humans, we love to get out. At the end of a long week, there's almost nothing more fun if there's a great film in the theater. I'm thinking ahead to, actually, The Last Jedi, for example. I can't wait to see that film. So we have to get out and have this experience of going to the theater. It's so much fun, and I think this industry is going to be around. I think AMC will overcome its near-term problems and also IMAX. Although, this year, you haven't been very happy to have been holding these shares. But they'll recover, and the industry itself is going to do well in the long term.