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Tickers in this Article: EPR, RGC, CNK, CKEC, MCS, NFLX, NCMI
In a recent CNBC interview, Warren Buffett said of the current economic situation: "It's fallen off a cliff. Not only has the economy slowed down a lot but people have really changed their habits like I haven't seen." One thing that hasn't changed is America's love of the movies. Year-to-date estimates for box office receipts vary between 10% and 18% growth, the best start to a year in over two decades. People are using movies as a relatively inexpensive escape from reality and the winners are the various companies that participate in the exhibition of film.

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It Starts With Real Estate

Since I wrote about Tinseltown last April, not much has changed for Entertainment Properties Trust (NYSE:EPR), the Kansas City-based real estate investment trust (REIT). The company continues to generate approximately 55% of its revenue from movie theaters in the U.S. and Canada. In late February, it delivered fourth-quarter funds from operations (FFO) of $1.16 per share, which is up 23% from 2007 but still three cents shy of analyst expectations. In addition to the miss, it cut its FFO guidance for 2009 from between $4.65 and $4.95 per share to between $4.05 and $4.35 per share. The two strikes knocked the company's stock price down to $14.82, a level not seen since 2001. The stock price back in April was $48.31, 185% higher than it is today. On March 10, it announced a first-quarter dividend payment of 65 cents ($2.60 annualized). For yield chasers, that's a 15% return. (Explore the controversies surrounding companies commenting on their forward looking expectations in Can Earnings Guidance Accurately Predict The Future?)

Operators Keep Things Running
Five out of the top 10 movie exhibitors in the U.S. and Canada are publicly traded companies, including Regal Entertainment Group (NYSE:RGC), Cinemark USA (NYSE:CNK), Carmike Cinemas (Nasdaq:CKEC) and Marcus Corp. (NYSE:MCS). Between them, they operate 13,182 screens across the country. The number-one operator, Regal Entertainment, announced on February 19 that it grew fourth-quarter earnings by 30% due to higher admissions and concession revenues. The stock reacted poorly, dropping almost 9% because it missed analyst estimates by six cents per share. At the same time, revenues grew 19% to $711.7 million, up from $599.9 million. Revenues missed analyst estimates by $10.3 million. To conserve cash, it cut its quarterly dividend by 40% to 18 cents (72 cents annualized). Some observers feel exhibitors are losing business to Netflix (Nasdaq:NFLX) and other at-home entertainment sources. However, they said the same thing when the VCR came into existence. The fact is, nothing can replicate the moviegoing experience.

The Product Keeps Them Coming Back
Warner Brothers, Paramount Pictures and Sony Pictures were the three top-grossing movie studios in 2008. However, a more interesting company is National CineMedia (Nasdaq:NCMI), which is 59.5% controlled by Regal Entertainment, Cinemark and AMC Entertainment (the second biggest theater exhibitor). In 2007, National CineMedia raised $754 million in an IPO. It has the largest in-theatre digital network in North America, providing three core products: First Look, a pre-feature branded advertisement program, CineMeetings, facilitating live corporate meetings in theatres, and NCM Fathom, providing live digital programming including concerts and sporting events. The business is a natural sideline for theatre operators. Its fourth-quarter revenues grew 18.9%, from $94.5 million to $112.4 million, and net income (excluding non-cash charges) grew 26.8%, from $8.2 million to $10.4 million. Most importantly, 2009 is already showing revenue and operating income before depreciation and amortization (OIBDA) growth over 2008. Its stock is down 36% since the IPO. Given its growth prospects, I'd be interested in buying here although I wish I'd found it back in November when the stock was below $5.

Bottom Line
Successful investing is all about going where the money's being made. In today's environment, there's no better place than the movie business.

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