Two positive developments occurred over the weekend for Carmike Cinemas, Inc. (CKEC). One, the box office was up approximately 19% overall with strong performances from Hotel Transylvania and Looper, according to boxofficemojo.com, and more importantly Carmike announced what looks to be an attractive acquisition at an attractive price. The stock is up approximately 7% in response, but plenty of upside remains in my view.
Carmike announced it has agreed to acquire Rave Reviews Cinemas for $119.4 million, of which $19 million is in cash and $100.4 million is in assumed capital leases on the 16 theatres with 251 screens. The acquisition multiple appears attractive at 5.1x trailing EBITDA of $23.6 million, about half the multiple Wanda paid for AMC Entertainment's circuit recently.
The Rave theatres are relatively new, upgraded facilities (all digital, 40% 3D, 7 IMAXs) and appear to outperform the average Carmike theatre in terms of attendance per screen and certainly on EBITDA/screen (but that is skewed by the lack of operating rents).
I am estimating the Rave theatres attract about 15% more in attendance per screen than Carmike's average of 22k/year. The acquisition is expected to close in Q4. I am now expecting Carmike to generate $125 million in EBITDA in 2013 and $1.30 in EPS versus $1.20 consensus according to Yahoo! Finance.
The fourth quarter box office is off to a strong start, up 19% this first weekend, with not only a number of potential blockbusters ahead (Skyfall, The Hobbit, Twilight sequel), but many solid mid-tier performers like Hotel Transylvania, Taken 2, Argo and Life of Pi among others, which should make for a record fourth quarter in my non-consensus view. See my detailed Seeking Alpha article here.
Carmike's stock continues to be undervalued trading at under 4.6x my 2013 EBITDA estimate and 9.3x my 2013 EPS estimate. As investors appreciate the improvements management has made in the circuit and balance sheet and with an expected significant earnings surprise ahead in Q4 and a solid one in 2013, I expect the shares can work their way up to my target of $20 in the coming year - which would represent 15x my 2013 EPS of $1.30 and 5.7x EBITDA, still a discount to larger players Regal Entertainment (RGC), Cinemark (CNK) and Cineplex (GM:CPXGF).