Potter and Spock vs. the recession

By Michael Brush

Despite the dire forecasts, this recession isn't the Great Depression, except in one sense: Movies are again providing a Great Escape from grim reality.

As I had forecast last year, recession-weary Americans are filling darkened theaters to hide from the gloom and doom, just as they did during the 1930s. That's made the film industry a rare bright spot in this economy.

The industry's total box office was up 1.5% last year despite the economy's slowdown, and people started heading to the theaters in droves this year as things turned really bad:

• Though retail spending fell 10% in the first quarter of 2009 compared with a year earlier, consumers shelled out 10% more to see movies in theaters.

• Movie spending was up 14% for 2009 through early May, compared with the same period in 2008, as fans flooded the theaters to lose themselves in hits such as "Monsters vs. Aliens," "Fast and Furious" and "X-Men Origins: Wolverine."

The $76.5 million opening of a new "Star Trek" adventure last weekend kicked the summer movie season into warp drive. And the trend will probably continue as film buffs enjoy potential mega-hits featuring the likes of Harry Potter and the Terminator.

"I think the summer lineup is terrific," says Michael Burns, the vice chairman of Lions Gate Entertainment (LGF, news, msgs). "It is just crazy-crowded."

"There's no obvious weak spot where you can say, 'That's going to be down weekend,'" agrees Jeff Blake, the head of Columbia TriStar Motion Picture Group's marketing and distribution at Sony (SNE, news, msgs). Sony's big film this summer, "Angels & Demons," a prequel to "The Da Vinci Code," will open May 15.

The Imax magic

One focus this summer will be on new technology. More theaters are using digital versions of films that are sharper and don't wear and allow for better 3-D. Fans love the technology. About 60% of the $180 million-plus spent on tickets to "Monsters vs. Aliens" was for the 3-D version, according to the National Association of Theatre Owners.

This could make a big winner out of Imax (IMAX, news, msgs), whose technology immerses viewers fully in movies with bigger screens and sound. Imax films have been taking a disproportionate share of the box office, even though tickets cost a bit more.

Imax picked up around 10% of the box office on its versions of the hit films "Watchmen" and "Monsters vs. Aliens," even though it had only around 2% of the screens.

And Imax is poised for more growth. It's aggressively converting screening rooms to its format in joint ventures with multiplex theater chains. It plans to have 250 of them by 2011, up from around 80. Imax currently has about 350 screens overall.

Movie stocks

Can big hits lift stocks? Yes. Consider the all-time highs for Marvel Entertainment (MVL, news, msgs) after its big hit with "Iron Man" last summer.

But investing on these trends is trickier than slipping into a darkened theater to forget about your problems.

Many film studios are nestled inside media giants such as News Corp. (NWS, news, msgs), Time Warner (TWX, news, msgs), Viacom (VIA, news, msgs) and Walt Disney (DIS, news, msgs), which have problems a hit alone can't fix. They face the challenges of severe weakness in other media businesses and slowing DVD sales.

Despite these challenges, many of these stocks have run up considerably in the past two months as hopes for an economic rebound have swelled. So to buy these stocks now, you need to have a time horizon of a year or more.

Or, like entertainment sector investing expert Larry Haverty, you have to believe a decent economic rebound really is in the works. Haverty manages the Gabelli Global Multimedia Trust (GGT, news, msgs), a closed-end mutual fund. "I'm pretty optimistic," Haverty says. "We still think the stocks are very cheap."

Haverty likes News Corp., Time Warner and Viacom at their current levels. But he's cautious on Disney.

In my opinion, Lions Gate Entertainment looks cheap right now at about $5. But I'd wait for a pullback in DreamWorks Animation (DWA, news, msgs) to below $20.

Marvel Entertainment, last year's big stock winner in this group, is having success now thanks to "X-Men." But it may stall out because its next big movie, "Iron Man 2," is not due out until May 2010.

Continued: Summer's big hits

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