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Theater operators surge on Kong-sized box office rebound

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Theater operators surge on Kong-sized box office rebound

The country's two biggest theater chains, AMC Entertainment Holdings Inc. and Cinemark Holdings Inc., enjoyed a fresh wave of investor optimism April 5 after they raised the curtain on "Godzilla vs. Kong" to an unexpected turnout of pandemic-weary moviegoers.

The record box office result, at least for the pandemic era, drove investors to the buy button. Monday opened firmly ahead of Thursday's close for both theater chains, and by close of market April 5, AMC shares had added more than 13% and Cinemark shares were up over 7% over April 1.

Shoring up investor confidence, B. Riley Securities analyst Eric Wold on April 5 revisited exhibitor tickers under his coverage, giving both AMC an upgrade to a "buy" rating. He had downgraded AMC to "neutral" during the pandemic on debt-load concerns. The company entered the quarantine period with a lopsided balance sheet, and to survive the quarantine, it added even more leverage.

Recently, AMC has been leaning more on stock issuances to manage its financial hurdles. In fact, CEO Adam Aron in an April 1 CNBC interview alluded to an upcoming sale of an additional 500 million shares. While investors did not respond so positively to the prospect of more dilution, bidding AMC down by 6.2% on April 1, Wold cited the company's equity strategy as a reason for his upgrade.

"Our only concern and reason for the prior Neutral rating had been the high levels of debt on the balance sheet and the strain this could place on future cash flows. However, with management increasingly signaling the ability and willingness to utilize equity to reduce the debt load, we can now be more constructive on the upside opportunity for the shares," Wold said in the upgrade note.

The analyst already had a "buy" rating on Cinemark, which has been widely viewed as better positioned to weather the global theater closures and a period of no revenue. For the one-week stock chart ended April 5, AMC shares were up more than 2% including the April 1 selloff, and Cinemark shares added more than 12%.

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"Godzilla vs. Kong," which opened concurrently on AT&T Inc.'s HBO Max streaming service, racked up $48.5 million in its long holiday debut, or $32.2 million over the Friday-through-Sunday frame. That made it easily the largest box office result since the pandemic shuttered theaters about a year prior, and even in range of openings for other franchise flicks. For example, the May 2019 opening of "Godzilla: King of the Monsters" landed $47.8 million over three days, according to BoxOffice.com.

BoxOffice.com had predicted the film would sell $41 million in tickets over the long holiday weekend, or $25.5 million over the three-day frame.

Wedbush Securities analyst Michael Pachter said the surge in attendance was indicative of pent-up demand. "Godzilla vs. Kong" is the first big theatrical event since both New York City and Los Angeles have opened their market, and vaccines are being distributed en masse.

"People really want to see movies, but they weren't willing to die to do so," Pachter said in an interview.

Pachter believes the market will return to normal levels of attendance by early 2022, or sooner if capacity restrictions begin to lift. "Godzilla vs. Kong" gave some data to his optimism, as consumers could have stayed home and still watched the film. Neither AT&T nor its Warner Bros. film studio disclosed specific numbers for the HBO Max streaming debut of "Godzilla vs. Kong," but the studio said the title garnered the largest viewing audience on the platform since its May 2020 launch, according to Variety.

As the pandemic wore on, AT&T and Warner Bros. said they would release the studio's entire 2021 film slate on HBO Max on the same day those films are available in theaters, raising concerns that exhibitors could suffer as consumers opt to stay home for new releases and criticism of the company for its affront to the traditional exclusive theatrical release window.

"That 'Godzilla vs. Kong' generated an impressive $48.5M in domestic box office even with the film available for free to HBO Max subscribers ... [is] possibly an indication that Warner Bros. made the wrong decision," Wold at B. Riley said in the April 5 note.

AT&T reports HBO Max subscribers bundled with its HBO customers across platforms, including its HBO premium TV network and associated HBO Now streaming app. The company on March 12 said HBO customers and streaming subscribers totaled 61 million at the end of 2020, and the last seven months of 2020 represented the fastest growth period for HBO.