As an asset class, film is uncorrelated to the other types of investments and to some extent is impervious to recession as folks are going to the movies in record numbers. They are also renting them in record numbers. The good news for investors is that even though discretionary spending will always have a huge impact on the industry, and consumers are hanging onto disposable income; they are still spending on the escapism entertainment that the big screen affords.
The movie industry plays in the form of common shares and is available to individual investors, but it is imperative that investors understand where in the sequence of production the companies lay and the risks those companies are subject to. Should you invest in a studio like Lions Gate Entertainment Corporation (NYSE: LGF), a smaller studio like Medient Studios Inc (OTCQB: MDNT) or distribution outlets such as Netflix (NASDAQ: NFLX)? On the silver screen, blockbusters benefit not just the movie studio that makes the film, but increased ticket sales at movie theaters. Even though attendance is down 11 percent, gross is up 17 percent, which is due to an increase in average ticket price of 32 percent. Carmike Cinemas, Inc. (NASDAQ: CKEC), Regal Entertainment Group (NYSE: RGC), and Cinemark Holdings, Inc. (NYSE: CNK) are the large players in this segment of the sector, controlling around half of the 40,000 domestic screens.
Another alternative is slate financing which is the hedge fund method to risk management and return on investment. This tactic involves investment in a portfolio of films, rather than a single production. The key here is diversification with the goal of balancing risk and return. The films included in the portfolio may depend upon the fund's co-financing efforts with the production and distribution company.
The fact is that 2013 is turning into an optimal time to invest in leisure, movies and related stocks. Crazy competition and rising consumer demand for content have enhanced earnings and share prices among related companies. Case in point: Lions Gate. Shares are up more than 40 percent so far this year. Netflix has shot up more than 100 percent as it fights its way back from a brutal, two year correction.
For movie studios, box office receipts and home video sales are still the chief money makers. Movies appear first in theaters then studios alternate release dates for the same films across a host of venues. Consumer spending on packaged content fell 5.5 percent last year to $8.5 billion. On the other hand, consumer spending on digital venues jumped 28.5 percent to $5.1 billion.
Industry estimates show that 60 percent or more of movies produced each year are box office bombs, but those that do resonate with viewers can generate nice returns for investors. Buying into the movie production segment of the entertainment industry has its rewards, but also its risks. Larger companies such as Lions Gate Entertainment Corp and The Walt Disney Company (NYSE: DIS) present less of a risk for perspective investors and are long-term options based upon their sheer size and production numbers. Some investors have a preference for the handful of smaller production companies that are publicly traded. But here, the risks may be even greater. Many smaller studios list on casually regulated markets, which are often rife with speculation. But then many investors are risk takers and are drawn to these smaller firms. Companies such as MDNT are small-caps that could yield potentially high rewards.
As an investment option within the sector, Medient is a strong small-cap play. The company is a publicly traded global film production and distribution firm with a robust presence in the world's two largest movie markets: North America and India. MDNT’S management team is solidly committed to significantly scaling up its current operations. To date, 14 movies and several hundred live performance shows have been generated under the Medient brand. As a sure sign of growth, the company has recently entered into a non-binding MOU worth over $40 million, with Prime Focus Ltd. The two companies will form a joint venture agreement for the provision of various assets and services by Prime Focus to Medient. The company will also invest more than $90 million in a 1,500 acre site in Effingham, Georgia, where it will develop movie studios, an entertainment facility, and campus. MDNT has a market cap of $23.7 million and is trading at an optimal entry point of $0.85.
The bottom line is that studios raked in $10.8 billion in 2012, up 6.5 percent from the previous year. Ticket prices have jumped up to an average $8 in 2012, from $6 in 2003. The number of tickets sold increased 6.1 percent to 1.36 billion. The numbers are nice incentives for interested investors, no matter which niche you choose.
Whatever your investment style, the ability of the financial sector to adapt chameleon-like to the ever changing market environment lends itself to closer scrutiny by investors.
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