After almost two years of faltering profits, major theater chains are finally starting a theater box office recovery as summer’s blockbuster season is in full swing. But an accelerated recovery in gross profit is happening amid concerns about a broader economic downturn, leading to questions on Wall Street about how quickly exhibitors can recover.
Ahead of the second quarter earnings season, B. Riley Securities analyst Eric Wold lowered his 2022 and 2023 domestic box office earnings forecasts “to provide a more realistic recovery and build some extra conservatism into our models.” ” Wold cited “a domestic box office performance in the first half of the year that was lower than we originally expected, and our estimates for the second quarter were lowered accordingly.”
Wold reiterated his “buy” ratings on stocks of listed companies Cinemark Holdings, Imax Corp. and The Marcus Corp., while maintaining “neutral” reviews on AMC Theaters and theater advertising network National CineMedia. (AMC Theatres, the largest chain, reports its second quarter results on Aug. 4)
“While the upcoming film franchise has become increasingly difficult in the third quarter, we believe the underlying demand patterns for high-profile films and expanding demographic reach bode well for the industry as it moves into Q4 and 2023,” said the B. Riley analyst argued. “We continue to believe the group is positioned for a return of valuation multiples to pre-pandemic margins as box office trends return to levels above $10 billion in 2023.”
Wold now forecasts a 28 percent drop in box office revenue for 2022 compared to 2019 levels, compared to a previous forecast of a 20 percent drop. He now predicts a 7 percent decline for 2023, instead of 3 percent earlier. “However, we continue to expect the major exhibitors to outperform at the same rate as in recent quarters,” the analyst wrote.
The Wall Street analyst remains bullish on stocks, even despite economic concerns. “With the heightened risk of a domestic recession in recent months, we continue to believe that the exchange can be viewed as a sort of safe haven within the consumer and entertainment spending segments (and should not experience the same inventory pressures as other discretionary consumer sectors).” said Wold.
Driven by Top Gun: Maverick and Jurassic World DominionMay and June saw gains at the box office, with a total from last month $1.114 Billion domestically, up from $409.2 million in the same month in 2021, but still lower than before the pandemic in 2019.
MKM Partners analyst Eric Handler, meanwhile, praised the outlook for Imax in a Friday report. In it, he lowered his second-quarter financial estimates for the company “as a result of Imax shutting much of the Chinese circuit for much of the second quarter” due to a resurgence of COVID-19. Handler now projects quarterly revenue and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of “$73 million (+44 percent for the second quarter of 2021, -30 percent versus the second quarter of 2019) and $25 million ( +185) percent, -40 percent versus Q2 2019), down $85 million and $33 million, respectively.”
However, he said, “Sentiment towards Imax remains overly bearish and does not reflect an attractive, two-fold revenue stream, global, asset-light business model with a focus on blockbuster content.” Explained Handler: “While we are lowering our Q2 estimates due to a longer-than-expected lockdown in China, this issue was temporary (we pushed installation revenue into Q3 and Q4), nearly all Imax screens in nationwide have reopened and the volume and quality of content should improve in the future as major title releases have been delayed.”
His conclusion: “We think filming in China will recover relatively quickly (as it did when the country first reopened in late 2020, early 2021) and will see a nice tailwind in the second half of this year.”
Speaking of blockbusters, the last quarter of 2022 in particular has “some megahits,” the analyst suggested. “We see the third quarter benefiting from a strong lineup in July, including: Thor: Love and Thunder (7/8) and no (7/22), as well as a number of high-profile titles in the local language in China, including: Mozart in space (7/15), which was partially filmed with Imax cameras.”
Handler added, “Checkout revenue should be higher in Q4 where we look for Imax gross profit to exceed $300 million for the first time since Q2 2019. Black Adam (10/21), Black Panther: Wakanda Forever (11/11) and Avatar: The way of the water (16/16).”
He continues to rate Imax stocks for “buy” with a price target of $23.