Box Office Comeback

Investors,

Hope you are all liking this volatility! Just remember to stay calm, buy real assets and hold for the long-term. If you underwrote and asset at $5 per share and the price falls to $4.50 on zero news, you should be buying more. When Mr. Market pukes on a position you own take the opportunity to load up on a cheaper price.

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Buy the dip…

That is what I did on movie theater stocks. I made a killing back in 2020 when theater stocks were at basement level lows. No one wanted to own them. They were all trading like their terminal value was zero and cash flows, let alone revenues, would never return.

I didn’t think movie theaters would go out of business so started buying the ones that I thought had the strongest balance sheets. When the Spring of 2021 came along, the stocks peaked. I cashed out and allocated elsewhere.

Prices fluctuated from the Spring to Summer going up and down in a small range. Most investors were expecting the Summer of 2021 to be a banner year as individuals return to the theater amidst a strong box office. Pent-up demand you know?

But as the summer box office slowly approached investors were disappointed as the box office was still down 40-60% compared to the 2019 Summer box office. Theater stocks subsequently fell.

On May 24th, 2021 I decided to start buying back in into my favorite little movie theater company. The stock was trading around $18-19/share. As summer approached the stock continued to fall as the box office was weaker than expected. We had a nice rally in June when the stock went back up to $22/share but after the initial summer burst the stock crumbled. During August and September the stock began to trade below $15 per share.

I was buying all the way down but when it broke under $15 I started to get aggressive. At that point the enterprise value was under $800 million, which was significantly below was the replacement cost of the real estate this company owns is.

In addition, the management team stated on the recent earnings call that they were actively looking to liquidate excess real estate, life insurance polices and had over $24 million in income tax receivables that would turn to cash sometime in the back half. I estimated there could be in excess of $75-100 million in non-core assets turned into cash over the next 12-18 months which would significantly de-risk all operations.

So with an implied enterprise value of $700 million (after all potential asset sales), extremely valuable owned and controlled movie theater and hotel assets and normalized EBITDA in the $100-150 million range, underwriting the security for a 2-3 year time period looked like cake.

I recently wrote an article titled “Top Four Stocks I Own” where I highlighted this little movie theater operator as one of my top positions. This was on September 15th, 2021 when the stock just started to rebound from the summer lows. The stock has continued to run, along with all other movie theater stocks, on the back of a strong box office for the remainder of the year.

In addition, Venom: Let There Be Carnage, performed extremely well this past weekend, bringing in over $90 million in the domestic box office. Remember, this is one of the first movies that Disney has released that does not have same day streaming. More importantly, Disney announced that they are done with the same day streaming model which should incrementally improve the domestic box office on all other films.

There is also a strong slate of movies coming out over the next few months which could catapult the box office back to a more normalized level. The No Time To Die Bond movie should perform extremely well over the coming months given that it is a highly anticipated movie with no same day streaming options.

And even if the box office doesn’t recover back to pre-pandemic levels (which I think is unlikely) I think my favorite little movie theater company will still outperform peers.

Not only does this company outperform their peers almost every quarter, but they have the strongest balance sheet and are one of the only theater companies to own their assets.

Given this large margin of safety, should the domestic box office normalize at a $9-10 billion level, I think this company has a real chance of actually taking market share from over-levered and struggling peers (think AMC).

I am very comfortable holding at the current levels and will continue to average down should Wall Street freak out again about the domestic box office not recovering fast enough. My price target is in the $30/share range which represents significant upside from the current valuation.

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