Time for Investors to Go to the Movies
Frank is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The movie theater business is one that has always intrigued me. I'm not a movie buff and on average I probably go to the movies four times a year. That number seems below average from what friends and family tell me. However, I see the power in the theater business.
Movie theaters are durable businesses that have high margins, generate lots of cash, and have high barriers to entry -- all attributes that I like to see in a business. As frequent readers of my articles will know, most of my investment ideas come from personal experience. My past experiences with going to the movies pushed me to research the business. In addition, being a long-time shareholder of Walt Disney has shown me the power of a good movie.
The theater business is comprised of just a handful of publicly traded companies. The two largest are Regal Entertainment Group (NYSE: RGC) and Cinemark Holdings (NYSE: CNK). Regal is the largest, having nearly 7,000 screens. Regal also has a very generous dividend yield of 5.9% and is reasonably priced at 15 times next year's earnings. Regal is growing, albeit very slowly. Revenue is expected to increase 3% this year.
Cinemark appears to be the best investment in the theater group. Cinemark has 5,200 screens, 1,300 of which are in Latin America. The company gets about one-third of its revenue outside the United States, a percentage that is certain to increase. Cinemark trades at 15 times next year's earnings and only 11 times cash flow. Cash flow is the most important measure, given that it's what funds dividends and expansion plans. Cinemark has increased its cash flow at an annualized rate of 23% over the last five years. Cinemark's dividend yield is 2.9%.
Cinemark is a cash-generating machine, generating $274 million in operating cash flow in the nine months ended Sept. 30, 2012. The company had $540 million cash on its balance sheet as of that date. As with other theater operators, most of Cinemark's revenue comes from admissions, and about 30% of the revenue comes from concessions. Concessions is the most important source of revenue since the product is marked up about four times, creating giant margins. In the same nine-month period, revenue from concessions increased 6.5%, more than the 3.4% growth in admissions.
2012 was a great year for theaters. Box office receipts were up 6%, driven by hits like The Avengers and The Hunger Games. This year shouldn't be any different, given that there are 27 franchise films slated for release. Franchise films such as sequels and spin-offs often generate much higher attendance than individual films.
Future years look bright as well. Disney has plans to revive the Star Wars franchise. The company will release three more Star Wars films in the coming years and also has plans to release spin-off films based on individual characters. In addition, Disney is continuing to leverage the power of its Marvel comic character movies. Other releases, including The Hunger Games, The Hobbit, and Star Trek, should drive plenty of traffic into the theaters for several years to come.
The Bottom Line
Cinemark appears to be the most attractive way to invest in the theater business, given its growth rate and reasonable price. It's not only an investment in the continued power of the theater business in the United States, but it's an emerging market investment as well. The future growth of Cinemark will almost certainly come from countries like Brazil, Mexico and Argentina. These are places where the consumer is gaining traction and their economies are becoming consumer-driven.
Movie theaters aren't recession-proof, especially in the emerging markets, but they are highly recession-resistant. The durability of Cinemark's business makes it a very attractive company. As a side note, many of the same institutional shareholders of Disney also own shares of Cinemark. That may not be entirely coincidental since Disney is slated to release many powerful franchise films in the coming years. The bottom line is that Cinemark looks like a great investment in both the U.S. and emerging markets. I think it's time for investors to go to the movies.
fjconstantino owns shares of Cinemark Holdings and Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!