Carmike Cinemas Earnings Preview: The Case for Upside

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Carmike Cinemas (NASDAQ:CKEC) will report its Q2:12 results after the market close on Wednesday, August 1, and will host a conference call at 2:00pm PT (dial-in: 888-221-1894, webcast: www.carmikeinvestors.com).

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We believe there is upside to our estimate for revenue of $136 million and expect EPS in line with our revised estimate of $0.30 (from $0.26 prior). This compares to consensus for revenue of $137 million, which likely accounts for Carmike’s again outperforming the industry box office in Q2. We are now above consensus for EPS of $0.29, as we believe Carmike can control its expenses while it begins to expand its footprint. With that said, we believe our revised cost assumptions are still conservative with regard to its historical patterns.

Carmike could outperform the industry box office again in Q2. Q2 industry box office decreased 1.3%, according to boxofficemojo.com. Carmike has outperformed the industry box office in the last two quarters, while underperforming in the yearago quarter. Given the successful promotions that drove traffic to Carmike theaters in the previous two quarters, we suspect that Carmike again grew its admissions revenue per average screen in excess of the industry average during Q2.

We recently increased our estimate for film rental costs in Q2 given the high concentration of box office within the top ten films. We are modeling film rental costs of 56.6% in Q2, 160bps above Q2:11.

Carmike completed a secondary offering early in Q2, and refinanced its debt.In early April, Carmike completed a secondary offering, raising ≈ $56 million (including the over-allotment) by issuing 4.6 million common shares at $13. On April 27, Carmike sold $210 million in 7.375% senior secured notes due 2019 to replace its January 2010 senior secured term loan due 2016, and opened a new $25 million revolving credit facility to replace its existing $30 million revolving credit facility. The proceeds were used to retire the existing debt and for general corporate purposes. We believe the company’s balance sheet positions it for growth through new theater builds as well as through small acquisitions.

Reiterating our OUTPERFORM rating and $19 price target. Our price target reflects a 6.3x EV/EBITDA multiple applied to our 2013 estimate, ahead of its peers, plus ≈ 7x applied to $3 million in incremental income we project in 2013 income from Screenvision. This is a premium to its historical multiple of 5.9x given the potential for substantial upside should revenue surpass expectations.

Michael Pachter is an analyst at Wedbush Securities. 

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