On Black Friday, Invest in Movies instead of the Mall?
Long lines at midnight. The threat of being sold out. Warnings of strikes.
Movie theaters probably won't have to worry about any of these on Friday.
And yet, despite the weekend's relative quiet, the film industry historically sees some of its highest sales figures around this time of year. With all these dollar signs flying around, it's natural for a potential investor to want to get in on some of the action. But are these companies' financial prospects truly fruitful, or little more than movie magic?
It's not hard to think of a recent hit from Lionsgate Films (NYS: LGF) . In fact, it might be harder to get away from them. This movie house has birthed such unavoidable franchises as Twilight, Saw, and The Expendables, also known as the film with every action hero you've ever seen. Not surprisingly, that movie was Lionsgate's most profitable ever, according to their website.
With all these hits, Lionsgate has had no problem maintaining huge revenues. In 2011, it saw sales of $1.5 billion dollars, up 1% from the previous year. However, look farther down the income statement, and the situation appears less rosy. Cost of production is a killer for Lionsgate, and most of the leftover money was dwindled away in advertising, leaving net losses of at least $30 million for three years in a row. If the company continues in this pattern, it won't have enough capital to stay afloat, much less reward investors.
A production company that is a branch of a greater whole, like Disney (NYS: DIS) , appears to have more of a chance for success. Even in the quarter of notorious flop John Carter, which lost $200 million in June, Disney's quarterly net income stayed well above $1 billion, and its P/E, a rational 15.51, compared to an industry average of 17. Even Disney sees its share of turkeys but, thanks to diversification, they aren't as crippling as they could be.
Production companies might not get huge rewards from high revenues, but do the movie theaters themselves? Yes, if your name is Cinemark (NYS: CNK) . This movie theater distributor has lately seen revenues well into the $2 billion range, up 6% from the last year. While competitor Regal Cinemas (NYS: RGC) brings in higher revenues, Cinemark's net income for last year was over four times larger than Regal's. Meanwhile, Cinemark's P/E of 18.75 suggests undervaluation, especially next to Regal's 21.22, and the industry's mean of 30.
Also intriguing is IMAX (NYS: IMAX) , which primarily makes money from providing its giant-screen services to other theaters. But, while it might look exciting, there may be cracks in this company's veneer. IMAX's sales dropped 4% in 2011, and its revenues pale in comparison to Cinemark's and Regal's, taking in only $230 million net revenue compared to these theater chains' respective $1 billion and $2 billion. IMAX's P/E is also astronomical -- in an industry averaging 16.94, it clocks in at 42.52. That huge screen might be breathtaking, but it might take some time before IMAX's financials match the product.
Are these blockbuster stocks, or just busted?
As it turns out, a string of smash hits doesn't guarantee financial success for the related companies. However, Cinemark and Disney are two businesses that have maintained stability for their investors. Should you choose to put your money in movie stocks instead of tickets, consider investing in these solid companies.
The article On Black Friday, Invest in Movies instead of the Mall? originally appeared on Fool.com.Caroline Bennett has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney and Imax. Motley Fool newsletter services recommend Walt Disney and Imax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.