by Janet Whitman
Hollywood racked up a record-breaking year at the box office last year with domestic ticket sales topping US$10-billion for the first time.
This year is off to a raging start as box office behemoth Avatar is set to sail past Titanic as the highest-grossing movie of all time and the highly anticipated post-apocalyptic drama The Book of Eli starring Denzel Washington opens this weekend.
But that doesn't mean investing in movie stocks now will turn out to be a blockbuster bet. Investors thinking of dabbling in the sector might do best if they consider themes, such as the surging popularity of 3-D.
"Individual investors are always going to find it a challenge to make money around movie studios," said David Bank, an analyst with RBC Capital Markets in New York.
"It's a hit-driven business. Movies, in general, tend not to be profitable. It's a really difficult space to make money."
Movie studios, most of which are housed as small subsidiaries within giant media and entertainment corporations, already have made most of their domestic box-office profits on last year's US$10-billion slate, including Avatar. And predicting which studios will turn out to have the next smash hits with moviegoers is total guesswork.
Rupert Murdoch's News Corp., the media and entertainment conglomerate behind Avatar, has received a nice boost to its bottom line recently from that movie's outsized performance, but the gain is already largely reflected in its stock price. After a pop, the shares have slipped over the past week as investors take profits after the Avatar effect.
Also, movies as big as Avatar are few and far between and another hit of that magnitude this year -- from any studio--is unlikely.
Wall Street analysts said such companies as News Corp., which owns 20th Century Fox, and Time Warner, parent of Warner Bros, could see some further upside in their stocks because of strong performances this year from their movie studios.
But the near impossibility of predicting what movies might be hits or misses and the many other variables at play in the stocks of such large companies mean there probably are better places within the movie business for stock investors to consider putting their money.
Particularly appealing are companies with big exposure to 3-D, a technology that has seen its popularity turbocharged by the success of Avatar.
Wall Street analysts particularly like movie studios such as Walt Disney Co. and DreamWorks Animation SKG Inc. and the companies that actually show movies, including Cinemark Holdings Inc., Regal Entertainment Group and Imax Corp.
Disney had a disastrous 2009 in the movie business.
That means the company's stock could have good upside potential this year, especially because of a shift in emphasis to 3D, with expected hits including Alice In Wonderland and Toystory 3 in its lineup.
"Disney has made 3-D a priority," said Mr. Bank of RBC, who has a "buy" rating on the company's stock. "It could potentially enable [the company] to gain market share at the box office."
RBC has a 52-week target of US$31 a share for Disney, which traded on the New York Stock Exchange yesterday at US$30.60, down US42¢ for the day.
Other analysts think the stock could hit US$35 this year.
Analysts also like Dreamworks, which has eagerly anticipated 3D movies How To Train Your Dragon and a third Shrek coming to theatres this year -- for the same reason.
"So far, they are the only studio committed to making all of their films this year in 3-D," said Tuna Amobi, media and entertainment analyst with Standard & Poor's in New York.
"[Dreamworks CEO] Jeffrey Katzenberg's strategy raised concerns initially, but what Avatar has done is draw a lot of attention to this new technology."
Around 70% of the hit science fiction film's domestic ticket sales were at theatres showing it in 3-D, added Mr. Amobi, who rates Dreamworks' stock a buy.
He has a target of US$45 a share on the stock. It traded yesterday at US$40.30 on the Nasdaq, down about US60¢.
Beyond being hot with moviegoers, 3-D also has huge appeal in the movie business because ticket prices are higher, so the revenue per ticket is increasing.
That's a nice boon for movie-theatre companies, which analysts said might be the best place for investors looking to capitalize on a hot Hollywood box office.
"Theatres are different from studios because they're pretty stable and generate steady cash flow every year," said Brett Harriss, an analyst with Gabelli & Co. in Rye, N.Y. "The business sometimes has swings, but nothing like the swings at a particular movie studio.... If the dollar falls, the company's profit will increase."
Mr. Harriss pegs Regal's worth at US$18 a share and Cinemark at US$19 a share. Their stocks closed yesterday on the New York Stock Exchange at US$14.78 and US$14.97 respectively.
Regal has rebounded about 48% from the March 2009 stock market lows but remains off its recent highs around US$22 in 2007. Cinemark has rallied 113% from the lows but is below its 2007 highs around US$19.50.
Another of his top picks is Toronto-based Imax, which he also rates a "buy."
"Their business model changed recently to joint ventures, so now they're getting a cut of the box office," he said.
"They're all 3-D and because they have a great brand and offer a premium movie-going experience, they can cherry-pick the year's best movies."
Mr. Harriss believes Imax is worth US$18 a share. The stock slid US48¢ yesterday on the Nasdaq to US$12.91 a share and fell 39¢ to $13.30 in Toronto.
Avatar in 2009. What will it be in 2010?
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Avatar will surely surpass Titanic's success. But with a lot of good movies set to release this year, it's still hard to guess which one will make it like Avatar. Who will scream "I'm the king of the world?"
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