Entertainment Sector's Mixed Results

By James Brumley | May 14, 2009 AAA

"Recession? What recession?" This would probably be the response if you asked the average teenager how they've dealt with the economic turmoil over the last year and half. That's the great part about not having 401Ks and real estate to worry about - as long as there's enough money for the newest video game, all's well in the world.

It looks like those teenagers did indeed muster enough money to plunk down on video games "Guitar Hero" and "World of Warcraft" - two of the biggest titles from Activision-Blizzard Inc. (Nasdaq:ATVI). The company earned $189 million in the first quarter of 2009 versus only $43 million during the first quarter of 2008. First-quarter sales were up to $981 million, topping last year's Q1 figure of $325 million.

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Was Activision's success a one-hit wonder? Or, do we take the growth at face value? In a way, the answer lies in the comparison to other entertainment stocks. The broad assumption might be inaccurate, but in most cases, the outcome is likely to be the same.

Escapism For Cheap
The idea of escapism (from the depression of the recession) is usually reserved to explain why movie attendance goes up when things are tough. However, on the surface, the numbers seem to jive with this theory. Regal Entertainment's (NYSE:RGC) reported 2008 fourth-quarter admissions were up 18% despite a slight increase in the average ticket price. As of the end of April, the U.S.'s box-office take was up more than 17% compared to the same time a year ago. Video games were lumped into the same theory, and for good reason.

Though the recession technically started in late 2007, 2008 was yet another record year for video game makers. The industry's retailers have been doing well too; GameStop (NYSE:GME) recently reiterated expectations for a flat to a light increase in Q1's same store sales, with earnings between 40-42 cents per share. The company is planning on an 18-22% increase in earnings for 2009. (If you thought investing and fun don't go together, think again. Find out more here Leisure Funds: Where Luxury And Fun Come To Make Money.)

Expensive Entertainment Takes a Hit
The Walt Disney Co. (NYSE:DIS) reported its Q2 income a few days ago - and it wasn't great. Income fell from $1.13 billion to $613 million. One of the reasons cited was diminished per-attendant spending at the company's theme parks, which was down a fairly-significant 6%. So, does the "escapism for cheap" assumption hold water? I'm not so sure.

If hard times are good for low-end entertainment stocks, then a recovery is the last thing Activision-Blizzard, GameStop, or Electronic Arts Inc. (NYSE:ERTS) wants. Disney or Royal Caribbean Cruises Ltd. (NYSE:RCL), on the other hand, would embrace a better economy.

The reason for this is that a six-night cruise Royal Caribbean Cruises starts at just under $500, and works its way up very quickly for even the most modest of accommodations and destinations. The entry price for a single day at Disneyland now stands at $69 for anyone over the age of ten, then there are the travel costs, meals and accommodations, which can really add up.

Compared to that, an $8.00 movie ticket or $15.00 per month to play "World of Warcraft" doesn't seem that bad. No wonder video games and movies have done so well while high-end thrills have fizzled. And no wonder those stocks are creating a buzz while consumers are cash-challenged.

Mixed Results
If you're basing investment decisions on the "obvious logic" that consumers spend less on entertainment during a recession, you may want to rethink things. Disney had a big move backwards in Q1, and acknowledged its movie operating profits fell from $377 million in Q1 2008 to $13 million last quarter. But weren't movies supposed to be a booming business right now?

Disney's theme park attendance was down a mere 1% at Anaheim's Disneyland, but was actually up 2% at Orlando's Disney World. But weren't expensive theme parks (and the $6.00 hot dogs they sell) supposed to be too pricey right now for strapped consumers?

The "cheap amusement" theory is already in tatters, and I've still got one more factoid to throw at you: Electronic Arts widened its quarterly operating loss in Q1, from $37 million to a $62 million loss; year-over-year revenue was down nearly 24% for the quarter. But aren't video games supposed to be all the rage during a recession?

Bottom Line
Let's get down to the brass tacks – Disney just hasn't put any good movies out this year; Activision's latest "Guitar Hero" installment was going to be a hit no matter what economic environment it was launched in; GameStop grew just as well during the 2005-2008 boon as it did during the recession. As usual, success is ultimately about giving people what they really want. (Being an informed investor is extremely important, but where and how do you get the data for your research? Read Data Mining For Investing.)

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