Movies are back – Godzilla v. Kong wins the weekend

When I first started writing about movies and investing in $CNK, $IMAX and $NCMI, there was no definitive proof post-pandemic that US consumers were willing to go back to theaters in numbers. My thesis was based on consumer behavior in Japan and China as well as some promising results from small wins like Croods: A New Age and Wonder Woman 1984. I was speculating on how consumers might behave and willing to bet on that possibility of behavior since the stocks involved had good balance sheets and viable business models.

That all changed this weekend with the release of Godzilla v. Kong in US theaters. The film established a new high water mark for domestic box office receipts with $32mm over Friday, Saturday and Sunday and close to $50mm over the five days since Wednesday. It has performed even better in international markets.

The domestic box office is back

Stocks re-rate when consensus opinions start to flip, and I want to show some quotes from this article that make abundantly clear the consensus from a few months ago was completely wrong:

“For anyone who may have doubted the pent-up demand for moviegoing, this performance is yet another sign of just how resilient the theatrical industry can be,” said Shawn Robbins, chief analyst at…

“The results for ‘Godzilla vs. Kong’ are absolutely mind-blowing and a represent a ‘welcome back’ of sorts for an industry that has been working its way back from the brink for over a year,” said Paul Dergarabedian, senior media analyst at Comscore…

“It should again send a message to studios that the world’s audiences are hungry for big cinematic releases,” Robbins said. “If ‘Godzilla vs. Kong’ can break out to these numbers in a still-handicapped domestic market with a simultaneous streaming release, imagine what other blockbuster contenders will be able to achieve in the months ahead when given a reasonable window of theatrical exclusivity from day one.”

“A sleeping giant is truly beginning to wake up,” he said

What’s more impressive is these numbers are happening with barely over half of theaters open compared to 2019 and vaccination numbers probably half of what they’ll be in two months. By the time films like Top Gun 2 and Space Jam 2 open in the summer, the environment for theaters is going to be maybe twice as strong in terms of capacity and total people vaccinated. What this means is that I think we will break the post pandemic high for box office receipts another 3+ times this year.

A few more quick notes:

– Remember the bears’ thesis that streaming services like HBO Max would crush theaters? Well, Godzilla v. Kong was a Warner Brothers production (recall Warner is owned by AT&T, which also owns HBO), as was WW1984. Both releases set post-pandemic US box office highs. Again, there appears to be zero evidence that streaming is materially weakening box office potential. In both these films, consumers could’ve watched for $15 on HBO Max. Many decided to visit half open theaters because they wanted the movie experience
– $NCMI, $IMAX and $CNK remain extremely well capitalized and for $NCMI the balance sheet looks even better than last time I wrote about them. $NCMI raised $50mm of new debt per its last earnings release and changed its credit agreement to kick out compliance with covenants:

On March 8, 2021 NCM LLC amended its Credit Agreement to (1) raise $50.0 million of additional liquidity at an interest rate of LIBOR plus 8.0% to mature on December 20, 2024 and (2) extend the waiver of any non-compliance with its Consolidated Net Senior Secured Leverage Ratio and Consolidated Total Leverage Ratio financial covenants

Prior to this agreement, I already though the company was well situated to survive for a year plus without revenue; this improves the runway even more and takes them out of danger of tripping covenants. IMAX had a blowout Q4 (and also had its biggest domestic opening weekend in a year) and CNK recently paid off debt and opened a big new theater. The theater names are showing major signs of life and I feel confident they should continue to re-rate, especially with a big summer blockbuster slate on the way.

Will Danoff has said before that you keep betting when your hand improves, and the Easter weekend results for theaters to me are holding high pair on the flop. I think the turn and river promise further strengthening as more blockbusters hit theaters, the vaccination effort keeps ramping up and theaters get back to 100% capacity. I am long $NCMI and $IMAX and continue to aggressively add to both positions.

Happy trading,