Mid-cap stocks can potentially offer an attractive long-term risk/return tradeoff. Over the last 20 years, mid-cap stocks have outperformed small-cap stocks and with lower volatility, while offering higher returns than large-cap stocks with only slightly higher volatility. Thus, the mid-tier companies, which typically have a market capitalization in the $1 to $5 billion range, have delivered stronger risk-adjusted performance than small- and large-cap stocks. I believe that mid-cap players that have strong business models and consistently delivering strong earnings are presenting an attractive investment opportunity.
Characteristics of Mid-Cap Stocks
Mid-cap companies are becoming popular among investors due to their historically better growth prospects than small- and large-cap stocks. Investors can pick up shares at a discount since they are not as widely held or popular as large-cap stocks. Still in the early stages of their growth life cycle, mid-caps have the ability to grow their operations and consequently value. Thus, they can normally grow earnings more rapidly than large-cap companies.
Over the last decade, mid-cap companies have grown earnings at a rate of 3%-4% more each year on average than large-cap stocks. When we compound this earnings growth over the life of the stock, it is evident that they outperform other stocks. Investors may also enjoy growth from acquisitions. Mid-cap companies are frequently acquired or merged by larger companies. These mergers and acquisitions can enormously benefit investors if the acquired company is profitable, and consequently the acquiring company is willing to pay a premium price for mid-cap shares.
In this article, I will discuss two mid-cap companies that have strong business models and consistently deliver strong earnings.
How Cinemark Is Set for Big Profits
Cinemark Holdings (NYSE:CNK) is one of the leading players in the motion picture exhibition industry, with theaters in the U.S., Mexico, Brazil, Chile, Argentina, Colombia, Peru, Ecuador, El Salvador, Honduras, Nicaragua, Costa Rica, and Panama. The company manages its business under two reportable operating segments: U.S. markets and international markets, which are further classified into three categories -- admissions revenues, concession revenues, and other revenue.
Cinemark's revenue model is simple. The company generates revenues mainly from the box-office receipts and concession sales with other revenues coming from screen advertising sales and other revenue streams such as, for example, meeting rentals, vendor marketing promotions, and electronic video games. Cinemark's contracts with NCM have assisted it in expanding its offerings to domestic advertisers. The company is also increasing ancillary revenue sources like third-party branding and digital video monitor advertising. Additionally, it is using its domestic theaters for substitute entertainment, like live and prerecorded sports programs, concert events, and other special presentations.
With this revenue model, it has been generating massive growth on its top line. At the end of the recent quarter, its top line showed growth of 19.6% to $757.6 million. Cinemark achieved record-setting results with a 19.2% increase in admissions revenues, while concession revenues increased up to 21.1% over the year-ago quarter. It also achieved all-time highs for attendance, adjusted EBITDA and adjusted EBITDA margin.
In addition, the movie theater chain has been looking for growth opportunities through acquisitions. Its revenues and attendance in the third quarter benefited from the acquisition of the 32 Rave theaters. This acquisition expanded its domestic theater base into one new state and seven new markets. Due to the strength and diversity of its global footprint, its international operations have now outperformed the North American industry in 17 of the last 18 successive quarters.
The company's solid top-line growth enables it to generate massive cash flows year over year. Both operating and free cash flows are growing, which is enabling it to return significant cash to shareholders. In the past year, the company has returned around $96 million in the form of dividends, while operating and free cash flows are at $395 million and $174 million, respectively. At present, the movie theater chain offers a quarterly dividend of $0.25/share with a yield of 2.74%. Its dividends look safe as free cash flows are providing full cover to dividends. This strong performance has been well appreciated by investors. In the past five years, the stock price has grown from $7 to $32/share at the time of writing. With earnings per share forecast growth of 28% this year and 32% in the next year, the stock has a lot of upside potential.
How Six Flags Is Set for Big Profits
Six Flags Entertainment (NYSE:SIX) is the largest regional theme park operator on the globe based on the number of parks it operates. The entertainment company operates 18 regional theme and water parks, 16 of which 16 are located in the U.S., one in Montreal, Canada, and one in Mexico City, Mexico. The parks are located in geographically diverse markets across North America. Its regional theme parks generally offer a wide range of state-of-the-art and traditional thrill rides, themed areas, water attractions, and shows and concerts. Combined with these attractive entertainment facilities, the parks also have restaurants, game venues and retail outlets, thereby providing an absolute family-oriented entertainment experience.
Six Flags is continuously seeking to improve parks and guests' experiences to meet evolving needs and preferences. Its business model is simple. The company derives revenue from the sale of tickets for entrance to its parks. Entrance ticket revenue contributes around 55% of total revenues. The second source of revenue comes from the sale of food and beverages, merchandise, games and attractions, parking, and other services inside the parks. Finally, the third source of revenue is sponsorship, licensing, and other fees.
With this business model, revenue generation is consistently growing. The company has been able to generate record revenue, EBITDA and EPS over the past 14 consecutive quarters. Its revenues were suppressed due to an accident at Six Flags Texas. Still, at the end of the latest quarter, it had generated record revenue of $505 million, representing a 4% increase over the same period in 2012. The company spends about 9% of revenues on capital expenditures. Six Flags is firing on all cylinders with innovative attractions at every park to achieve all-time high guest satisfaction ratings.
Year-over-year growth in the top line paved the path to returning significant cash to shareholders both in the form of dividends and a repurchase program. During the past nine months, the amusement park company has paid $131.4 million in dividends and $504 million in the form of stock repurchases. Recently, Six Flags has increased the quarterly dividend from $0.45/share to $0.47/share. Its healthy cash flows allow it to make huge increases in its dividends as its free cash flows provide adequate cover to dividend payments. In the past nine months, Six Flags has paid $131.4 million in dividends, while free cash flows are at $216 million. This strong financial performance is also impacting its share price, which has gained around 310% over the past five years. I believe Six Flags is a safe company with an increasing dividend to provide investors with a steady stream of income and a rising stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.