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You Ought to Be in Pictures

If you like munching on popcorn in crowded, dark, and confined spaces, summer can't come quickly enough. Celluloid wishes are on tap for what appears to be a record season at the box office, and that means movie theaters are going to be buzzing. From eagerly anticipated sequels to Jurassic Park, American Pie, Rush Hour, and Scary Movie to a remake of the classic Rollerball and Tim Burton's take on Planet of the Apes, we're only beginning to scratch the surface of what will be soon be playing at a multiplex near you. Video game fanatics have Final Fantasy and Tomb Raider coming to the big screen. Marlon Brando and Robert De Niro are looking for The Score. Steven Spielberg is back with A.I. And they're all coming hot on the heels of May blockbusters The Mummy Returns, Shrek, and Pearl Harbor.

It's a summer that will live not in infamy but in the record books. But with so many "can't miss" epics, the only certainty is that some will miss. With the major studios well represented with feature presentations, banking on the success of the likes of Vivendi's(NYSE: V) Universal, Viacom's(NYSE: VIA) Paramount, or Disney(NYSE: DIS) is ultimately misguided. These companies have become diversified mega-entertainment conglomerates to the point where a couple of hits or duds won't make or break them.

For example, despite mastering the theatre and home video distribution channels, Disney's studio ranks third behind the company's broadcasting and theme park efforts. At Viacom, with bigger fish to fry with Infinity, CBS, and Blockbuster, the company's studio efforts made up less than 10% of last quarter's revenues.

No, the sure thing lies in the folks selling you the Junior Mints and the bucket of soda -- the theater chains.

The movie theater chains are back in the spotlight. No matter which studio has the strongest hand this summer, the movie houses will be the ones working the projectors. It hasn't been easy for the industry. Since last summer, overexpansion and highly leveraged balance sheets forced Loews Cineplex Entertainment (OTC: LCPFQ) and Carmike Cinemas (OTC: CKECQ) into filing for Chapter 11 bankruptcy. However, with many movie houses shuttered and growth reined in, the industry seems to be getting back on its tripod.

Finding a public chain that isn't a speculative bet is not easy. The largest, Regal Cinemas with over 4,300 screens, was taken private back in 1998. Loews and Carmike continue to trade for penny-stock gamblers but their fate is one recapitalization plan away from fading out. That leaves AMC Entertainment(AMEX: AEN).

While AMC shares have doubled so far this year, they still trade at a fifth of their high, set five years ago. The company has turned an operating profit through the September and December quarters but is not expected to report an actual profit any time soon because of the nearly $20 million it must shell out every quarter in interest expense payments. That stings, but it is not an impossible hurdle to clear if the company begins to grow its take to the point where it can pay some of that debt down.

AMC derives two-thirds of its sales from box-office receipts (the bulk of the balance comes from the overpriced concessions). As with any inflation-tweaked variable, ticket prices tend to inch up every year. The movie studios also command the lion's share of a film early in its release with the scale gradually tipping in favor of the theater. With so many summer flicks angling for atypically long shelf lives, and sellouts for the latest features feeding patrons into older fare, it's a great time to be a movie-house operator.

But it's not just a bumper crop of theatrical releases that will line folks up at the box office. It is also socio-economical factors. Sure, we'll all be a little more tightfisted with our discretionary income, but with grand vacation plans scaled back, affordable local entertainment will be much in demand. Movies, anyone? In moviespeak, that's a take.

Rick has big plans for the summer season. Real big! He owns shares of Disney. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

Summer Stocks represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.


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