Analyst Predicts Two Consecutive Years of Box Office Drops, Cuts Exhibitor Stocks Price Targets

B. Riley FBR's Eric Wold says that will "pressure" film theater stock valuations until mid-2020 before the group “begins to see some love” from investors.

With Frozen 2 ringing in the all-important final stretch of the box office year, Hollywood's eyes are on whether year-end tentpole releases can help make up the 6 percent domestic revenue decline the industry has recorded year-to-date compared with 2018.

B. Riley FBR analyst Eric Wold in a Friday report lowered his fourth-quarter and 2020 forecasts for the exhibition sector. He now predicts a 4 percent box office decline for 2019, followed by another drop in 2020. As a result, he reduced his price targets on all exhibition stocks and even downgraded shares of Cinemark to "neutral."

"Consecutive Annual Box Office Declines Could Pressure Valuations Into Mid-2020" is the title of Wold's report.

"We are revisiting our exhibitor coverage as we approach the most important stretch of the fourth-quarter 2019 film slate, which will bring Frozen II, Jumanji: The Next Level, and Star Wars: The Rise of Skywalker to screens," the analyst wrote. "However, with quarter-to-date box office down 14.7 percent after weak results from Doctor Sleep, Terminator: Dark Fate and Charlie's Angels, we now believe fourth-quarter box office could be relatively flattish year-over-year versus consensus expectations for a mid-single-digit increase. ... This could lead to a full-year 2019 box office decline of around 4.0 percent."

Since Disney completed the acquisition of Fox and moved Avatar 2 from 2020 to 2021, Wold has also been projecting a low- to mid-single-digit box office decline for 2020. "However, with a high number of 'untitled' TBD placeholders on the calendar, we are taking a more conservative approach and bumping our assumed decline to mid-single-digits until we get more visibility into the quality of the film slate," he wrote. "This takes our 2020 exhibitor estimates well below current consensus expectations."

The analyst predicts that film theater investors will be cautious over the near term. "We increasingly believe that investors may choose to avoid the exhibitor group, at a maximum, or put a lid on valuation multiples, at a minimum, until well into mid-2020 given the diminished outlook for the film slate — and that it may not be until mid-2020 when investors begin to shift their focus to the 2021 slate before the exhibitor group begins to see some love," said Wold.

He explained his Cinemark downgrade from "buy" to "neutral" this way: "While we have become increasingly optimistic around improving results for the Latin American circuit after years of attendance declines, we believe that short-term domestic box office movements are more likely to influence valuation decisions over the next 6-12 months." The analyst cut his price target on the stock from $46.50 to $37.

Wold maintained his "buy" rating on Imax's stock, but reduced his price target from $34 to $30, calling it "a standout within the group due to the about 70 percent of box office generated from international markets, the four-year backlog visibility and near double-digit screen growth projections."

Wold also continues to rate AMC Entertainment shares at "buy" while cutting his price target from $19 to $15. "Even with an expected 2020 box office decline, we remain confident in the ability of AMC's Stubs A-List subscription program to (profitably) take and market share in the coming years," he wrote. "Coupled with self-help driven free cash flow improvements, we expect this to provide valuation support for the shares."

Despite his lower box office forecasts, Wold emphasized that "we remain positive on the long-term outlook for the exhibition sector and believe that most investor/media concerns around increasing streaming competition have been misplaced and recognize that there are often strings of successes and failures in the box office."