Let’s Go To the Movies
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As we enter the busy movie release period during this holiday season, now is a good time to take a look at some of the movie theater operators and other investment ideas related to the slew of films coming our way in the next 60 days. The North American cinema business is dominated by theater owners Regal Entertainment Group (NYSE: RGC), AMC Entertainment, which is owned by a private Chinese conglomerate, Cinemark Holdings (NYSE: CNK) and Carmike Cinemas (NASDAQ: CKEC). In addition to these theater operators that control about half of the continent’s screens, investors can gain exposure to the industry’s advertising dollars through National CineMedia (NASDAQ: NCMI) or the burgeoning premium digital theater systems that are the domain of IMAX (NYSE: IMAX). Although I won’t be examining the studio companies in this post, underlying the analysis of each of these companies is the fact that they are dependent on the studios for the content that drives theater attendance, the lifeblood of these cinema related companies.
Theater Companies
With more than 6,600 screens in more than 520 theatres in 37 states and the District of Columbia, Regal is the biggest theater company in North America. Using its leading position, the company has generated operating cash flow and free cash flow as a percentage of revenue that has easily beat both Cinemark and Carmike. Regal’s long term operating cash flow to revenue has been more than 15% compared to only about 13% for Cinemark and more than 8% for Carmike. Similarly, Regal has generated free cash flow that has been about 11% of revenue compared to less than 7% for Cinemark and less than 3% for Carmike.
Regal also has a higher dividend yield than its two competitors at about 5.4% compared to 3.2% for Cinemark. Carmike does not pay a dividend. These compelling attributes have attracted investors and Regal currently trades at a forward price to earnings to growth (PEG) multiple of 2.0x which is a significant premium above Cinemark at 1.25x and Carmike at 0.80x.
While Carmike has struggled historically versus its much larger rivals, it is the better investment at current prices for several reasons. First, the company has a dominant position in the rural theater segment where it faces little competition and has significant acquisition opportunity because independent theater owners lack the scale to be competitive. In about 70% of its markets, Carmike is the sole operator. Second, the company has been aggressive in converting to the digital format with almost 95% of its screens currently digital and a growing number of 3-D screens as well. The conversion to digital will allow the company to access more content as studios are rapidly moving away from the traditional 35 millimeter format. With its growing 3-D films capability, Carmike will be able to capture more of that segment which commands higher ticket prices. Third, Carmike has a 20% stake in Screenvision, a theater advertising company that is valued at between $150 million to $200 million. Screenvision is the second largest cinema advertising company behind National CineMedia and allows Carmike to lessen its reliance on theater attendance as a revenue source. Finally, the compelling PEG ratio at 0.8x currently makes Carmike the preferred theater operator investment.
Advertising
National CineMedia enjoys the dominant position in the cinema advertising business via its exclusive rights to Regal, AMC, and Cinemark theaters. The company was formed by these theater operators in 2007 and they maintain a combined 51% ownership. In addition to cinema advertising, the company also has internet and mobile platform operations. A recent study confirmed that cinema advertising as a standalone strategy is more effective than television advertising, and it also showed that the cumulative effect of combined television and cinema advertising has an even greater impact on consumer acceptance of advertising. This effect should allow National CineMedia to command premium pricing for its services, a real competitive advantage. At a PEG multiple of 1.29x, National CineMedia is reasonably priced for a company that has exclusive rights to its customers, has compelling pricing power, a robust dividend yield north of 6%, and outstanding historical cash flow to revenue of around 30%.
Theater Systems
As the leading provider of large screen digital 3-D theater systems, IMAX is on the leading edge of the film industry’s transition. Currently, there are 689 IMAX theatres in 52 countries and the company commands premium pricing because films in the IMAX format significantly outperform the attendance rates of traditional films. While the PEG multiple is appealing at just 0.62x, it assumes earnings growth of about 35% which is aggressive for a company that has had choppy EPS of $0.23, $1.51, $0.09, and ($0.79) in the past 4 years and which has been able to produce just under 7% operating cash flow to revenue over that time. While I appreciate the company’s strong industry position and pricing power, as a long term investor I prefer to wait for the company to stabilize and grow its cash returns before buying shares.
Going to the movies is one of the enduring traditions of the holiday season and shrewd investors should be thinking about how moviegoers’ open wallets can become their next investment idea. Among the theater operators, I think Carmike is a long term winner while National CineMedia shares offer a reasonable price for a good investment story. IMAX is in a great position to succeed long term but right now seems a little pricey so it belongs on the stocks to watch list. Going to the movies can be a fun way to spend a few hours during the holidays and spending a few hours researching cinema related companies might lead to even more holiday cheer for investors.
56Steve has no positions in the stocks mentioned above. The Motley Fool owns shares of Imax. Motley Fool newsletter services recommend Imax. 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!
