DEEP ANALYSIS: Box Office Results for These 3 Theater Stocks

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

Q2 domestic box office results were down 1.3%, below our up 1.9% estimate.  According to boxofficemojo.com, domestic box office results for the quarter ended June 30 were down 1.3% compared to our up 1.9% estimate. Regal’s (NYSE:RGC) quarter ended June 28, resulting in Q2 box office of down 2.7%. We are revising our Q2 estimates for the exhibitors to reflect the final box office tally. Our Q2 revenue estimate for Regal goes to $729 million from $762 million, for Cinemark (NYSE:CNK) our Q2 revenue estimate goes to $627 million from $642 million, and for Carmike (NASDAQ:CKEC) our Q2 revenue estimate goes to $136 million from $140 million.

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April domestic box office ended down 9.0%. The Hunger Games was the number-one movie in April, after its late-March release. Also notable was the re-release of Titanic in 3D, having earned $57 million during April. We expect studios to continue re-releasing mega-blockbusters in 3D due to the lift they provide to typically slower periods.

May domestic box office ended down 1.3%. The Avengers was the runaway blockbuster in May, breaking the opening weekend record and surpassing expectations, with $532 million domestically during May. However, Pirates of the Caribbean: On Stranger Tides and The Hangover Part II both earned ≈ $150 million during the end of May last year, while Men in Black IIIearned only $83 million during the end of May this year (MIB 3 has earned $170 million to-date).

June domestic box office ended up 4.7%. June box office ended up 4.7%, with Madagascar 3 ($176 million in June) in the lead, while The Avengers ($605 million in Q2) was by far the highest grossing movie during Q2. As expected, Disney’s (NYSE:DIS) Brave ($121 million in June 2012) outperformed last year’s Disney release, Cars 2 ($90 million in June 2011).

We expect continued weakness in Brazilian box office to be offset by growth in smaller markets. According to boxofficemojo.com, Brazil’s box office was down 12% y-o-y in Q2. Mexico’s box office was down 3% y-o-y in Q2. However, the smaller Latin American markets’ strength appears to be largely offsetting weakness in Brazil and Mexico, with Argentina up 22% year-over-year, Colombia up 4% y-o-y, and Peru up 26% y-o-y. Combined, our tracked Latin American markets were down 2%.

We expect film rental costs to be slightly higher than we had modeled due to a higher concentration of total box office within the top ten movies. We increased our estimate for film rental costs for our covered exhibitors due to a higher-thanexpected concentration of total box office within the top ten movies, driven largely by exceptional box office receipts for The Avengers ($605 million in Q2).

For Regal, we lowered our assumption for income from National CineMedia for Q2, based on the latter’s most recent 10-Q filing. We had previously assumed a $5 million income assumption for Q2; based on National CineMedia’s most recent filing we believe our estimate is overly optimistic. We have lowered our assumption to $2 million for the quarter.

We are lowering our EPS estimates for Regal, Cinemark and Carmike to reflect these changes. Our Q2 EPS estimate for Regal goes to $0.20 from $0.31, and for the full year, our EPS estimate for Regal goes to $0.91 from $1.03, compared to consensus of $0.88. Our Q2 EPS estimate for Cinemark goes to $0.43 from $0.46, and for the full year, our EPS estimate for Cinemark goes to $1.62 from $1.65, compared to consensus of $1.61. Our Q2 EPS estimate for Carmike goes to $0.26 from $0.29, and for the full year, our EPS estimate for Carmike goes to $1.28 from $1.32, compared to consensus of $1.07. Our 2013 estimates for revenue, adjusted EBITDA, and EPS all remain the same.

We are maintaining our NEUTRAL rating and $16 price target for Regal. After accounting for Regal’s ownership stake in National CineMedia, we arrive at a $16 price target. This reflects a 6.1x EV/Adjusted EBITDA multiple on our 2013 estimates, below its historical multiple of 6.3x and in line with its peers. In our view, this multiple reflects a stable business with low growth, while also reflecting debt levels. Regal is currently trading at a 5.6x multiple on our 2013 adjusted EBITDA estimate.

We are maintaining our NEUTRAL rating and $24 price target for Cinemark. After accounting for Cinemark’s ownership stake in National CineMedia, we arrive at a $24 price target, which reflects a 6.1x EV/EBITDA multiple on 2013 estimates. Cinemark’s multiple reflects its growing international footprint and lower debt ratios, while maintaining our caution given its dependence on economic growth in Latin America. Cinemark is currently trading at a 6.0x multiple on our 2013 EBITDA estimate.

We are reiterating our OUTPERFORM rating and $19 price target for Carmike. Our price target reflects a 6.2x EV/EBITDA multiple applied to our 2013 estimate, in line with 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 earnings upside should revenue surpass expectations. Carmike is currently trading at a 5.6x multiple on our 2013 EBITDA estimate.

Michael Pachter is an analyst at Wedbush Securities.

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