Even though consumer discretionary is on the decline, the film industry has been historically resistant to recessions. During the Great Depression, Hollywood went through a Renaissance, and the film industry boomed. I expect the same thing to happen in this current downturn, as global box office sales have reached all-time record highs. In addition, movie theaters are also charging record-high inflation-adjusted prices for movie tickets (average of $7.89) without detracting customers.
Cinemark (CNK) stands out in the theater industry because of its reasonable valuation, a steady business during recessionary times, a high dividend yield of 4.31%, and enormous growth opportunities through expansion into Brazil.
Cinemark is the third-leading movie theater operator in the United States, operating 436 movie theaters in North and Latin America. Unlike many other consumer discretionary companies, movie theaters are not tied to the conventional business cycle. Instead, Cinemark follows a separate cycle based on the release of popular movie titles. Due to a relatively weak film lineup for the past year, earnings over the next four quarters should beat expectations, as a list of highly anticipated sequels and blockbusters will be released in this period. The lulls are in the fall and early spring and sales tend rise in the anticipated summer and Christmas seasons. As a result, late October is a good entry point to buy Cinemark.
In addition to its US business, Cinemark has a fast-growing business in Mexico and Brazil, which together constitute 12% of the company's revenues. At just one movie theater for every 82,000 people, Brazil has one of the world's lowest rate of movie theaters per capita. (As a comparison, the US is 8,000 people per theater, 27,000 in Mexico, and 37,009 in China.) This disparity in the number of cinemas related to the population leaves plenty of growth for new theater construction to reach the saturation in other emerging markets. American movies are popular across the globe, and going to the movies is a newly affordable form of entertainment for the growing middle class in Brazil (defined as an income level above $6,000 per year).
Financially, the company is good shape, but the 4% ROIC is concerning. This can be explained by Cinemark eschewing investing in growth to pay down debt, which is needed as the company's debt to equity ratio is a high 1.6. The stock is reasonably valued with a price to cash ratio of 4, a forward P/E of 11.88, and a PEG of 1.59. However, I expect the price to rise and the valuation expectations to increase with growth of the theaters in Latin America.
Overall, I expect Cinemark to outperform the S&P 500 due to its growth in Latin America and the relative economic stability of the film industry. The stock's technical support level of $18 is the entry point I recommend in this turbulent market to buy the stock.