Carmike Cinemas: An Undervalued Movie Exhibitor

| About: Carmike Cinemas, (CKEC)

Carmike Cinemas (NASDAQ:CKEC) describes itself in its 10-K filing as follows:

We are one of the largest motion picture exhibitors in the United States and as of December 31, 2010, we owned, operated or had an interest in 239 theatres with 2,236 screens located in 36 states. The majority of our theatres are equipped to provide digital cinema and as of December 31, 2010, we had 220 theatres (92% of our theatres) with 2,103 screens (94% of our screens) on a digital-based platform. In addition, we continue to expand our 3-D cinema deployments and as of December 31, 2010, we had 200 theatres (84% of our theatres) with 596 screens (27% of our screens) equipped for 3-D.

We target small to mid-size non-urban markets with the belief that they provide a number of operating benefits, including lower operating costs and fewer alternative forms of entertainment.

On July 15, Christopher Mittleman, chief investment officer at Mittleman Brothers LLC, discussed Carmike Cinemas. His investment thesis as articulated in this video clip is as follows:

  • Carmike, and cinema exhibitors in general, are resilient to the economic business cycle. Instead they follow their own cycle, which is based on the quality of film being offered.
  • The cinema industry is not in decline and, in fact, revenue was strong in 2010. 2011 is modestly down but that is largely due to the fact that Avatar had such a positive impact on 2010 box office results.
  • Carmike, by virtue of being in small markets has a Buffett-like moat around the business with no real direct competition within 10-20 miles of its cinemas.
  • Carmike generates significant cash flow and, at its current price, has a free cash flow in excess of 15%, which means that even if the stock price does not increase the investor is getting a 15% cash-on-cash yield.

He argued that based on these facts Carmike should be worth $12. Carmike closed at $6.72 on July 15, meaning that this price target represents a return of almost 80%. The $12 price is based on 7x EBITDA and 10x free cash flow. Mr. Mittleman points out that Carmike’s main competitors, Regal Entertainment (NYSE:RGC) and Cinemark (NYSE:CNK), already trade at these levels and Carmike should as well.

And Mr. Mittleman’s comments were before Harry Potter opened last Friday and set box office records over the weekend. As noted on

Potter 7 propelled the industry to its largest 3-day non holiday weekend with around $263 million. The prior record was 7/18/08 for $260.5m which was the weekend The Dark Knight opened. (The largest 3-day holiday weekend ever was a Xmas 2009 with $270.2m.)

While the yearly box office has been down versus 2010, it still has generated $5.5 billion of revenue through July 10th (before Harry Potter).

And it is also worth noting that Carmike has opened several “BigD” theatres recently, including an announcement regarding Savannah (pdf).

Carmike’s description of BigD (pdf) is as follows:

Named “BigD,” the totally re-designed new auditorium includes a screen measuring 79 feet wide and over three stories tall, the latest in 7.1 surround sound and Digital projection of both 2-D and 3-D features. In technical terms, Carmike's BigD DIGITAL experience is powered by a cutting edge Christie Brilliant 3-D flash projector. Images are projected onto a colossal wall-to-wall, ceiling-to-floor screen. The end result is a light output of 30,000 lumens, creating a picture quality with noticeably higher resolution than HD.

The BigD concept allows Carmike to charge a premium price and compete with IMAX and other larger format venues. But given the lack of direct competition in Carmike’s markets, the real value is providing a better viewing experience in return for a premium price.

It should also be noted that there has been insider buying recently by the CEO, which can be a bullish signal.

With Harry propelling the box office for the next few weeks, a strong slate of movies lined up for the remainder of 2011, the magnitude of the cash flow Carmike generates, and the current valuation of the company at 6x 2011 EBITDA, the investment thesis is an easy one to understand.

Disclosure: I am long CKEC, CNK.