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By Kris Tuttle

When we started doing our work on 3D cinema as part of our RealVR theme, we ran across Cinedigm (NASDAQ:CIDM). The company is very small and a true nano-cap ($44M) so we focused instead on larger players like RealD (NYSE:RLD), which recently completed an IPO, and XpanD which is a large, and still private, player internationally. [Our published reports on these companies are available on the following links: RealD_IPO Preview and R2 Though Leader Interview Ami Dror of XpanD. (pdf files)]

The other reason we held off on Cinedigm is that their good story is somewhat obscured by their funding of equipment for theaters, which has resulted in the company carrying a large amount of debt ($253M) relative to their size. Investors generally dislike this type of “asset heavy” business, especially in digital entertainment. The company is also in the midst of a CEO search and working on improving their very limited visibility with the public and potential investors. But there are reasons to expend the effort in getting past all the mind-numbing financing discussions and view the company as an attractive play on digital and 3D cinema technology. Not the least of which is that the equity appears to be significantly undervalued.

The Basics

Cinedigm offers movie theaters and entertainment venues a full set of products and services (including financing) to help them transform from old fashioned film to networked, digital entertainment centers. The company integrates third party technology like RealD into a total solution, and has their own proprietary software and some network services that add value and provide some differentiation to their solution.

The company divides their business into two segments, Media Services and Content & Entertainment. Media Services (Media) includes digital cinema deployment and financing revenues, and ongoing services like digital content delivery and exhibitor software. Content & Entertainment (Content) includes alternative content such as live entertainment offerings and pre-show advertising services. In the most recently reported quarter, Media accounted for 78% of revenue and content 22%.

I find it easier to look at the company as 1) a provider of deployment assistance and financing, and 2) a provider of services and content. On the deployment side, the company is actively focused on adding their deployed theaters and has a stated goal of reaching 14,000 screens in two years. We’re not going to get into the deployment picture too deeply here because it gets complicated in terms of “Phase I” and “Phase II” deployments, financing, etc. However, one client of ours summarized this area best by noting that the company has a fair amount of “some decent built-in EBITDA growth for the next two years.” In fact, management has stated that each additional 1000 screens adds $2-2.5M of EBITDA to the income statement.

The services and content segment is more interesting. This includes ongoing digital film delivery, security and management, management software, administration services, alternative content including live events and independent films, and advertising services. Entertainment centers like cinemas have been going through something of a renaissance thanks to technologies like 3D. Feedback from live sporting events and concerts viewed on large screens with powerful sound have been very positive and yet another revenue stream for venue owners and operators. Cinedigm is in a good position to capitalize on this trend.

The company recently divested its IT hosting and services business and is looking to sell its small exhibition business. Although small divestitures, these moves should help simplify the company story and streamline operations.

In July the company sold just over 347K shares for $1.44 to incoming director Peter C. Brown, a former executive of AMC Entertainment. This is a strong vote of confidence for an industry insider and new board member.

Competition

The large exhibitors in the US (AMC, Cinemark (NYSE:CNK) & Regal (NYSE:RGC)) formed their own entity, Digital Cinema Implementation Partners LLC (DCIP), to provide the financing and infrastructure for their 14,000 or so screens. This leaves the rest of the market, which consists of hundreds of smaller exhibitors ripe for Cinedigm to work with.

Some digital cinema technology companies like Sony (NYSE:SNE) offer deployment services, financing and related technology to comprise a complete solution. However, these services are focused only on the specific offerings of that vendor which means they have limited appeal. Cinedigm can work with any and all technology providers including Sony, Dolby (NYSE:DLB), RealD, Barco, GDC, NEC, Christie, etc.

There are also a few small providers of these services and another public player, Ballantyne Strong (NYSEMKT:BTN), which seems to be both a competitor and a partner depending on the deal. National CineMedia (NASDAQ: NCMI) is in the space but focused on being the advertising services platform for the big theater networks (AMC, Regal, and Cinemark). Firms like XDC (based in Belgium) show up in international markets.

In short, direct competition is a smaller factor for stock appreciation than continuing market adoption and company execution.

Attractive Valuation

We’ve applied our Intrinsic Value model and come up with an initial estimate of $5.25 for the stock. We’ve kept the assumptions fairly conservative, at least in terms of the multiple (17.5x), growth (circa 10%), and allowed for quite a bit of dilution from outstanding warrants. As one of our favorite institutional salesman has commented, “if the idea still works when I cut your price target in half it’s a keeper.” That’s certainly true in this case.

Improving Visibility

So far the company has been making efforts to get in front of investors wherever they can. That’s been limited to begging their way into lower-end investor conferences but may be looking up as they begin to get a bit more recognized. I figured that a blog post here would at least help get some basic elements of the story out there.

The company is scheduled to report earnings on November 11th, participate in a panel discussion at a Piper conference on November 9th, and present at a small investor conference on November 16th.

Disclosure: I have a small long position in CIDM stock at the time of this writing. Some numbers above are provided by CapitalIQ.

Source: Cinedigm: An Attractive Play on Digital, 3-D Cinema Technology