Investment Idea #13

Are people still going to the Big Screen?

The death of cinemas have been predicted time and again. While it might be true in certain geographies, the prediction, in this author’s opinion, has been by and large wrong. The chart below shows that it was wrong until 2002 and although tickets sold started dropping in the US and Canada (-c.25% over 17 years from 2002 to 2019), box office revenue did not and has kept growing.

Number of movie tickets sold in US and Canada, courtesy of statista.com

Global box office revenue has continued to grow as ticket prices increased, like everything else thanks to inflation. China, India and the rest of the developing countries are also picking up hundreds of millions of movie goers and that further evidenced that the prediction has gone awry.

At the height of COVID-19, everyone believed that cinemas were never coming back. We can watch Netflix, along with so many other streaming services. Disney, the biggest producer of cinema worthy content like Star Wars and Avengers went all in with streaming. Most of the blockbusters are now available on Disney+, sometimes at the same time to movie hits the cinemas. Industry experts and analysts wondered if we will really see the Death of Hollywood.

I think we will not. The thesis is the same as a previously discussed name: Live Nation or LYV. Going to the movies is an experience, while we will go less, we want to go because it is memorable and we save that one movie we want to watch on the big screen and we bring the whole family along to create that experience. That is why box office has continued to grow.

The company we will discuss today is the right franchise for this investment thesis:

Simple financials (Dec 2023 estimate, USD)

• Sales: 385mn

• EBITDA: 125mn

• Net income: 25mn

• FCF: 50mn

• Debt: 137mn, Mkt Cap 1.04bn

Financial Ratios

• Estimated ROIC: 6% and ROE: 7%

• EV/EBITDA 9.2x (Dec 24)

• PER 18.9x (Dec 24)

• Past margins: OPM 8-20%

• FCF yield: 4.8%

While the numbers above do not project the attractiveness, the stock is interesting because it is a company that is selling intellectual property and the business economics scaling will be exponential as the cinema industry recovers and grows in the years ahead. Its core IP can also be sold into homes, non-cinematic venues, outdoor theatrical experience locations and theme parks, amongst other opportunities.