Movie Theaters, Euro/Dollar Parity, and Crypto Winter

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The per-film performance is fantastic. We're really seeing a lot of great hits right now, good content that people really want to come back out and see. For the movie theaters themselves, the concessions are doing exceptionally well.

Hello and welcome to the Barron's Streetwise Podcast. I'm Jack Howe. The voice you just heard is Alicia Reese. She's an analyst at Wedbush Securities, and in a moment, she'll tell us about the sudden strength of the movie business. We'll also hear from UPS CEO Carol Tomé about how she has gained market share from FedEx. And I'll say a few words about euro-dollar parity and the outlook for stocks and why we should all stop using the phrase crypto winter. Listening in is our audio producer Jackson. Hi Jackson.

Hi Jack.

Tell me about the most recent movie you've seen in a theater and tell me it's not It's still Dune.

No, actually, no, no, that, that's not correct. I saw Batman. I think that came out after Dune.

Obviously a memorable film, made an impact on you. When did you see it?

Like mid-March, March 15th-ish.

I want you to think carefully about this. What did you eat while you were there?

Uh, popcorn, Junior Mints. It's always the classics.

Soda? No soda?

Yeah, I think I I sipped on someone else's soda, which probably wasn't the best.

A stranger's or someone you know?

Someone I knew, a friend.

That's good. That's good. I'm happy to report that the movie theater business, including concessions, is back, sort of, depending on how you do the math. More on that in just a bit. First, let me zip through 3 things that might be on investors' minds right now. First is the euro, which reached parity with the dollar for the first time in 20 years. So what does that mean? Currencies rise and fall relative to each other for a variety of reasons, all of which relate to supply and demand. Investors like to move money toward regions with healthy yields, but not at the cost of runaway inflation. Those two things can offset each other, so investors try to predict which one will win out by looking at factors like economic strength and debt levels and likely central bank actions on interest rates. And everything's relative, so the currencies that are rising don't have to look great, they just have to look better than the ones that are falling. One reason the dollar has been gaining on the euro is that the war in Ukraine is hitting the European economy harder than the American one, in part because Europe is much more dependent on Russian oil and natural gas. Another reason is that although both Europe and the U.S. have high inflation, the U.S. has a head start on raising interest rates, and investors might be betting that the U.S. will be more able to sustain higher interest rates without sending its economy into a deep recession. The upshot for consumers is that eurozone residents will pay higher prices for imported goods, especially American ones, while American tourists might find that trips to Europe are suddenly cheaper. The second thing I'll point out is that B of A Securities just slashed its outlook for U.S. stock returns. The S&P 500 index was recently trading near 3,800. B of A had previously predicted that it would hit 4,500 by the end of the year, which would have worked out to an 18% gain. It now predicts that the S&P 500 will fall to $3,600 for an additional loss of 5% from here. That's obviously a big change in thinking. There's no telling if B of A's forecast will prove accurate, but I'm more interested in its reasoning. What has changed? Strategists at the bank now predict a mild U.S. recession starting this year, which will cause corporate earnings to decline next year, and that'll bring down stock prices. The next bull market, the bank says, will likely have to wait until the Federal Reserve stops raising interest rates and starts cutting them. It predicts the Fed will do just that by this time next year. We'll see. The third and last thing I want to touch on is crypto winter. I hear that phrase everywhere, and that's a problem. I've made no secret of my crypto skepticism on this podcast and in the pages of Barron's and on TV. And the last thing I'm interested in now is piling on the negativity with crypto prices crashing and some crypto projects and platforms collapsing altogether. Just this past week, a crypto lender called Celsius Network filed for Chapter 11 bankruptcy protection. Anyhow, I find the phrase crypto winter troubling because it implies that there's a spring around the corner for those who are patient and brave. Some investors might even be tempted to bottom fish here for likely crypto survivors. Let me give you a few opinions on that. First, there's no such thing as a blue chip cryptocurrency. All of them have been conjured into existence within the past 15 years. There's nothing to be learned from the last crypto winter that tells us what Bitcoin will do next. This isn't a seasonal event. It's entirely possible that we've entered a stock winter and a crypto extinction event. If we have, and if you own quality stocks, sit tight and take comfort in your dividends, especially if you reinvest them, because stocks become more attractive as prices fall. But the same cannot be said of crypto. There are no earnings, cash flows, or dividends to provide downside support. I can't rule out a big Bitcoin bounce down the road, of course, but I don't recommend that you count on one as part of your long-term savings plan. Let's move on then to movies. First half box office receipts in North America were up 228% from last year, which means nothing. Last year there were barely any movies and barely any theatergoers because of the pandemic. A more telling comparison is that the first half of this year was down 31% from 2019. That's back when Avengers: Endgame hit movie theaters. Remember, it was Thanos and he had collected all those Infinity Stones and there was a big battle with all the superheroes. And I'm not going to tell you what happened with Iron Man, but Jackson cried a little bit. Tell the truth, Jackson.

I cry at the beginning of every Pixar movie, every short that they have.

And people say I overshare. Anyhow, the point now is that there still aren't many movies out, only about half as many so far as we had back in 2019. So if the film count is down by half and the box office is only down 31%, and if we're comparing with one of the biggest booms in movie history, that suggests that things aren't so bad. To learn more about that, I reached out to an expert on the theater business. Hey, Alicia, Jack Howe from Barron's. How are you?

Good, thanks. How are you, Jack?

That's Alicia Reese, and she covers movie theaters for Wedbush Securities. She says that box office performance per film this year has been fantastic.

People are going to see these movies in premium large-format screens where available. They're excited about the content. The content is bringing them out, but there's just not the volume that there was before to really get to that same 2019 comp. I think we get back there in time, just not yet.

I had a recent call with Paramount CEO Bob Bakish, and he talked about his methodical return to movie theaters this year. First, Paramount brought out Scream and Jackass Forever, which targeted younger viewers who Bob figured would be among the first to go back to the movies. Both of those movies did well, so Paramount released a romantic comedy called The Lost City and the latest Sonic movie for families. All 4 of these movies debuted at number 1, so it was time for the studio to try a higher-stakes release: Top Gun: Maverick. That one has been a monster. It was a top box office draw of the first half, and it just passed Titanic as the highest-grossing Paramount film. There have been notable successes from other studios. Minions: The Rise of Gru set a box office record for a July 4th weekend release. Alicia at Wedbush mentioned strengthening concession sales too, which made me curious. When you say concessions are doing well, do you mean, are we like eating more popcorn and snacks and drinking more soda than we did per movie before the pandemic?

Yeah, I think it's a nostalgia effect. You know, people are excited to get back and they miss the popcorn in the seat, they miss the candy.

I always look for, and I don't see them often enough, the Good Plenties. For any movie theater chiefs who happen to be listening to this, Bring the Good Plenties. They're good and there are plenty of them. I find that they're aptly named. The licorice candies? The licorice, yeah, exactly. It's like a candy-coated—

It's an acquired taste for many. I appreciate those as well, but not many do.

Jackson, how about a Good Plenty fun fact?

They taste bad and they stick to your teeth.

That's nothing fun about that. First of all, those aren't facts and they're not fun. They are believed to be the oldest branded candy in America, dating back to 1893. What do you have to say for yourself now? Don't answer that. Your stunned silence is enough for me. Back to box office numbers. China is still struggling, but North America is strong. If you want to compare now with a period with a similar number of releases, Alicia says you have to go all the way back to 1999 to 2001. Remember the original Matrix? That was 1999. So was Austin Powers: The Spy Who Shagged Me. Why make trillions when we could make billions? North American quarterly box office numbers back then were generally below $2 billion, but this latest quarter brought in $2.3 billion. What matters to studios more than box office receipts is return on investment. I asked Alicia about that. It's got to be great, uh, because, you know, the, the return on investment at the theater, and then they're making more money on the movies by putting them into streaming, which didn't exist a short while ago, right?

And with the shortened theatrical windows, and for a film like Top Gun, it's definitely not necessary. It can clearly get to a 90-day exclusive theatrical window. But for other movies that don't perform quite as well, they they can shorten that theatrical release and send it to their streaming and make some money off of it there. And with that shorter period of time, that really gives the studios a lot more flexibility. And that actually helps the theaters as well because they'll put more titles. I think we'll get back to that volume more easily because there is less of a hurdle to put your movie in a theater if you don't have to keep it in there for 90 days.

Alicia says the movie slate looks pretty light for the second half of this year and that it will take a while for studios to ramp up output. But she also thinks the time for mass theater closings has passed and theaters are experimenting with making money beyond movies.

Esports has been the one they've tested the most so far, and that's done pretty well. I think they can really ramp that up. There's, there's a lot more they can do with that. But the one that they've been testing most recently is live concerts, and I think that's that's actually really promising. You know, like BTS was a huge event and they play in one country, but people in a variety of other countries want to see that. And if they can digitally broadcast that live, you're going to bring out audiences around the world for some of those concerts. I think live comedy shows, they haven't tested that yet as far as I know. We'll see how that goes, but I think it's primarily going to be concerts and esports.

There are a limited number of theater stocks to consider, and AMC Entertainment's share price has detached from box office realities. That one has become a meme stock. So what does that leave? Alicia is bullish on IMAX.

They're the only company in the theater space that is ramping up their footprint globally. And I think they're also best positioned for alternative content with IMAX Live. So I think that's probably the best play in the space.

Alicia also likes Cinemark, which had to suspend its dividend during the pandemic. She thinks it'll be among the first theater companies to restore its full dividend. Thank you, Alicia. Coming up, we'll hear part of my conversation with the first outside CEO hire in the century-plus history of UPS. That's next after this quick break.

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Morningstar, where data speaks. Welcome back. Let's get to my call with UPS CEO Carol Tomé. I have never arrived somewhere as a new CEO, but I have been somewhere when a new CEO has arrived and everybody kind of, you know, listens. And maybe it's cautious optimism with an emphasis on the cautious. Everybody's waiting to see, okay, how is this person going to do for us and what's going to happen here? So in that situation, how do you win over the workers? How do you get them on your side and get them to buy into what you're proposing?

Well, I was very nervous about coming in as the new CEO because I was the first outsider in the company's 112th year anniversary at that point. So I was nervous about it. And I had planned this tour. I was going to go around the world and meet UPSers and walk our facilities and meet with customers. And I thought that would be a good way to onboard. Well, I couldn't do that because of COVID Everything shut down. So I'm like, all right, I need to go on a listening tour using Zoom. It was fantastic. And as I was listening to what they had to say, I'm like, huh, what got us here isn't going to get us to where we need to go. There are some things that we need to do differently. One was to let people bring their authentic self to work. We had very restrictive policies as it related to facial hair. You couldn't have facial hair. If you were African American, you couldn't have natural hair. You couldn't have a fro or a braid or a twist. Our tattoo policy was more restrictive than the US Army. We're like, we can let go of the edge of the pool here and let people bring their authentic self to work. So that was, you know, people are like, huh, this is different. Then we ran our company by committee. So all the decisions were coming up to committees and oftentimes to the CEO. And I'm like, oh no, no, no, no, no, no. We gotta push the decision-making closer to the customer. So, we busted all the committees and really worked on empowerment and building trust. And, you know, it brought some fun into the workplace in a crazy environment. You know, I stood up in the front of the group when I first came on board and said, "We're going to have some fun and we're going to kick some ass." And people were like, "What?

No one says that at UPS." Carol said step one was to invest in speeding up the shipping network. She also reviewed each step of UPS's interactions with small and mid-sized businesses to remove friction and improve the customer experience. And she embraced a platform that UPS had established to help stores set up their e-commerce activities.

So we said, well, we're going to establish a digital platform that allows that customer to sell through the storefront, if you will, that digital storefront, and we'll deliver the goods for them. We call that the Digital Access Platform, or DAP. It was in its infancy stage when I started back in 2020. This year, DAP will be a $2 billion business in the United States, and we're taking that outside the United States as well.

You mentioned e-commerce. I've never seen such wild swings in people's spending habits as I have over the past couple of years. How do you manage something like that as a CEO?

It was a little chaotic, candidly, in the face of the early stages of COVID because People started to shelter in place and they needed essential goods and we were essential workers. So we had to go to work every day, put on our uniforms and deliver packages or fly planes around the world. And we didn't have enough people. So in the second quarter of 2020, we hired 40,000 people just to take care of the volume that was coming into our network. We also used the technology that the company had been investing in over the past several years. In fact, since 2017, we've added 22.5 million square feet of automated sort. So we have this amazing smart global logistics network that we could move products and packages around depending on how the volume was playing out. So kudos to the people who were here before me, the leaders before me who built this network, because it allowed us to be very agile in the face of a very dynamic environment.

Do you expect conditions, broadly speaking, to become easier or tougher in the year ahead? And what do you think will be your biggest challenge?

The market is extraordinarily dynamic and it varies by geo and by customer segment. For example, we just came off of 70 days of lockdowns in Shanghai because of COVID 70 days we didn't deliver a package in Shanghai. Now our hub stayed open so packages could flow through China to other countries. Our UPSers slept on the floor of our hub for 70 days to keep that business running. It's a dynamic environment. Environment. If you come back to the United States, you see that depending on the customers that our customers serve— so think about retailers. Some serve lower wage earners, some serve higher wage earners. There's a difference in those businesses because of how inflation is impacting low wage earners versus high wage earners. What we are doing is controlling what we can control, acting in an agile way, and we can do so because of the power of our smart global logistics network. And look through this environment because it's tough right now, but we're going to look through it to the future. We've got 2 days of strategy coming up this week. We're going to talk about UPS of 2026 and UPS of 2030.

For investors out there, when they're looking at, you know, you or your competitor and they say, well, boy, I see some of these e-commerce giants who are handling more of their own delivery and what does that mean? And What is the— what should I think about the long-term future of a UPS? What keeps them safe and strong and competitive? What are their advantages? What would you tell that investor?

For those pure-play online retailers, we are part of their supply chain, but we are not their entire supply chain. And we serve them in the way that we can serve them best. And we're OK with that. There's plenty of business for us to deliver in the United States today and going forward.

Thank you, Carol and Alicia, and thank all of you for listening. If you have an investing question you'd like to ask on the podcast, just tape it on your phone, use the voice memo app, and send it to jack.hough— that's H-O-U-G-H— at barons.com. Jackson Cantrell is our producer. He'd like to apologize to the good folks at Good and Plenty I, I stand by what I said.

See you next week. Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you.

Morningstar, where data speaks.