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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Regal Entertainment Group

May 27th 2011 Regal Entertainment Group
NYSE Symbol: RGC
Industry: Movie Theatre
Price as of 5/27: $13.90

Sell in May and go away has worked so far as the major averages have declined four straight weeks for a 2% pullback. The commodities turned around this week as Goldman Sachs turned more bullish once again after going bearish only a month ago. In particular, Goldman recommended oil and select metals like Copper, Zinc, and Gold. The healthcare and consumer staples continue to lead in this weak environment as investors flee to defensive income producing ideas. As we enter Memorial Day weekend, most of us start longing for the summer months and everything that goes with it including the summer blockbuster movies. This week, we'll feature two movie related stocks. The first is the movie production company DreamWorks with has its' own blockbuster in theaters right now. DreamWorks stock performed great in 2010, but 2011 has been a different story although Kung Fu Panda 2 could change things this week. The stock is certainly not a conservative investment, but hopefully with better than expected ticket sales from the big fat panda, DreamWorks' stock could bottom and perform much better the rest of the year. The second, a movie theatre company, Regal Entertainment has become a solid income stock. Regal Entertainment doesn't care which movie performs well this summer as long as movie goers come to their movieplexes. Regal Entertainment is not a growth or a capital appreciation idea, but an income stock with a healthy 6% yield and goes ex-dividend on June 2nd.

Back in April, DreamWorks reported net income of $8.8 million, or 10 cents per share, compared to $22 million, or 24 cents per share a year earlier. Excluding one-time items, analysts polled expected the 10 cents per share. Revenue fell 33% to $108 million from $162 million. Analysts had expected $106 million in revenue. The numbers were down dramatically due to the fact there were no movie releases in the first quarter verse 2010 when the studio launched How to Train Your Dragon late in the quarter and benefitted from sales of merchandising rights ahead of the release. A majority of the first quarter sales came from DVD sales. Shrek Forever After DVD contributed $20 million in sales in the quarter. The new DVD release of Megamind added $18 million in revenue while How to Train Your Dragon contributed $9 million. Kung Fu Panda also contributed $12 million in revenue from international TV licensing deals. Madagascar 2 added $19 million, mainly from TV at home and abroad. Older titles contributed $30 million in revenue. The Company also provided an update to its share repurchase program. Year to date, the Company has repurchased approximately 0.9 million shares for $25 million or an average price of $27.77 a share. The Company still has $125 million remaining to be used for share buybacks. Looking forward, Dream Works' second quarter and full year results will be driven by Kung Fu Panda 2, which is scheduled to be released on May 26, 2011. Television revenue for Madagascar 2, How to Train Your Dragon and Shrek Forever After are also expected to contribute to the Company's second quarter results.

Regal Entertainment which operates the largest theatre circuit in the US reported a first quarter loss of $23.6 million at the end of April verse a gain of 16.5 million a year earlier. Analysts were expecting a modest gain. Revenue came in at $570 million verse revenue of $719 million last year. The CEO indicated that the first quarter was challenging, but they were pleased to complete a refinancing of their senior credit facility for a rollout of digital cinema. The company is also looking forward to the upcoming summer movie season. As you would expect, Regal generates a large portion of their business in the summer months. Analysts expect Regal to generate 50% of their yearly profits in the second quarter and 25% of their sales. So both companies and stocks have a lot riding on this weekend and this summer season.

Currently, DreamWorks earnings estimates are flat for 2011 into 2012 trading for 14 times earnings, 2.8 times sales, and 1.6 times book value of $15 a share. There is no dividend so DreamWorks is not an income idea; therefore investing in DreamWorks is a value play and a turnaround story for investors expecting Kung Fu Panda 2 to turn in better than expected ticket and merchandizing sales.

Regal Entertainment's earnings should improve slightly year over year, but the stock trades for 27 times 2011 earnings and 19 times next years' earnings. The stock sells for less than one times sales, but has a negative book value. Investors looking at Regal Entertainment want the dividend yield of 6% and will have to buy the stock on May 31st to receive the next dividend.