Movie Theater Operators An Easy Pick For 2015

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Includes: AMC, CKEC, CNK, IMAX, RGC
by: Dan Strack

Summary

Domestic box office revenue has performed poorly YTD in 2014.

A strong movie line-up for 2015 will drive revenue growth for movie theater operators.

These aren't sexy picks, but will outperform the market as a whole next year.

One theme I'm following for 2015 is simplicity. Markets are incredibly complex and can become overwhelming if you allow them too. New technologies, regulation, political instability, inflation, movements in currency, valuations, macroeconomic pressures and interest rates are just the tip of the iceberg when it comes to factors that influence stocks. Trying to decipher all potential angles when considering which stock to buy can drive investors crazy and lead to second guessing. Sometimes a good pick isn't sexy and doesn't involve complex analysis to uncover hidden gems. I believe one area that will outperform the market in 2015 are movie theater operators. Investing in a movie theater operator isn't fun and exciting like investing in the latest and greatest technology or trying to time the bottom in a beaten down stock, but this industry does provide attractive yields and will grow revenue in 2015.

Poor 2014 Performance

(YTD - Jan. 1 - Dec. 15)

Box Office Gross

Average Ticket Price

2014

$ 9,675

$8.12

2013

$ 10,229

$8.13

2012

$ 10,203

$7.96

2011

$ 9,510

$7.93

2009

$ 9,927

$7.89

2008

$ 9,799

$7.50

Source: BoxOfficeMojo

Domestic box office revenue has declined roughly 6% YTD and is at its lowest levels since 2011. Reports have sounded off on the decline of moviegoers between the ages of 12 and 24, which saw a 7.1 movies in 2014 versus 8.4 in 2013, as a growing concern, but this decline has more to do with fewer blockbusters being release than it is a growing trend. While there were specific movie successes during 2014, such as Guardians of the Galaxy and The Lego Movie, the 2014 lineup lacked blockbuster success. YTD the top 5 movies of 2014 have grossed $1.37 billion versus $1.69 billion in 2013. This trend is even larger when looking back to 2012, when the Avengers was launched, which had over $2 billion in revenue from the top 5 movies.

2015 has a variety of blockbuster movies being released that will be viewed as "must see" in the theater. The Avengers: Age of Ultron, Star Wars: The Force Awakens, James Bond: Spectre, Fast and Furious 7, Jurassic World, Minions, Mission Impossible 5, Hunger Games Part 2 are just some of the blockbusters set to release in 2015. The Avengers and Star Wars alone have a chance of out grossing the top 5 movies of 2014 by themselves. This strong line-up is also spread out evenly across the calendar year, which will further enhance movie theater revenue potential by avoiding movie overlap. A weak 2014 combined with a very strong 2015 lineup sets up movie theater operators for tremendous revenue growth potential and visibility.

Movie Theater Operators

 

Market Cap ($ billions)

# of Screens

YTD Revenue ($ millions)

Y/Y % change

Dividend Yield

Fwd. P/E

Cinemark (NYSE:CNK)

$ 4.0

5,629

$ 1,967

-3.2%

2.9%

16.7

Regal Entertainment (NYSE:RGC)

$ 3.2

7,366

$ 2,191

-4.8%

4.3%

16.5

AMC Entertainment (NYSE:AMC)

$ 2.5

4,959

$ 1,983

-2.6%

3.2%

22.9

Carmike Cinemas (NASDAQ:CKEC)

$ 0.6

2,917

$ 504

8.1%

0.0%

22.5

IMAX Corp (NYSE:IMAX)

$ 2.0

837

$ 188

3.2%

0.0%

26.4

The 5 biggest movie theater operators in the US are Cinemark, Regal, AMC, IMAX and Carmike. All 5 should benefit from a strong 2015 line-up. However, like any industry, not all companies are created equal.

 

Operating Income Margin

Net Income Margin

Cinemark

13.5%

7.3%

Regal Entertainment

9.7%

2.7%

AMC Entertainment

5.7%

1.7%

Carmike Cinemas

5.7%

-1.3%

IMAX Corp

14.3%

9.5%

Looking at margins, Cinemark and IMAX come out on top. Both have managed to keep costs down and benefit from healthy margins. Carmike has been the worst performer of the group based on margins, but was the only movie theater operator to grow revenue at a healthy pace.

 

Total Debt ($ Billion)

Cash ($ Millions)

Cinemark

$ 2.05

$ 546

Regal Entertainment

$ 2.36

$ 244

AMC Entertainment

$ 1.91

$ 155

Carmike Cinemas

$ 0.45

$ 96

IMAX Corp

$ -

$ 93

Looking at the balance sheets of the 5 major operators, IMAX stands out as the clear winner with zero long-term debt and decent cash on hand. The 4 other companies have fairly significant debt loads when taking into account market capitalization. However, most of this debt had been taken on to expand their theater footprint or upgrade existing theaters to attract a wider audience and should reap benefits going forward. Having decent profit margins also justifies these debt levels as sustainable.

Conclusion

Movie theater operators should all experience strong revenue growth in 2015. A combination of poor 2014 box office revenue and a strong 2015 movie line-up is the perfect storm to benefit from revenue growth and weak quarterly comps. Picking which company to invest in should fall to investor preference. Investors focused on dividend growth and income should consider Cinemark, Regal or AMC as top picks. Cinemark has some of the best margins, but the stock does have added risk with a large weighting toward Latin America. AMC benefits from its strong weighting toward the major US markets, with number one market share in the top 3 markets (New York, LA, and Chicago). AMC has also invested heavily to upgrade their theaters with all having 3D capability and one-third housing an IMAX screen. As the name suggests, IMAX specializes in IMAX theaters and has a presence in 57 different countries making it the most geographically diverse. IMAX currently trades at the highest valuation, but may also offer the most upside potential. I believe moviegoers will prefer the higher quality theaters in 2015 slightly more than the standard screens, which should give AMC and IMAX a small edge, but as I said before, all 5 companies should see strong growth in 2015.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.