Summary
Our top pick for 2018 is Reading International (NASDAQ:RDI). At a high level, we believe investors in Reading at today’s prices are paying a significant discount to Reading’s intrinsic value as a standalone company, and that a unique combination of value enhancing investments, industry consolidation, a hostile takeover offer, and litigation among the controlling shareholders will unlock significant value in 2018. In a standalone scenario, we think Reading’s shares are worth at least $20/share in 2018, and in a scenario where each of the company’s parts are auctioned off to the highest strategic bidder, we believe the company would be worth at least $25/share and potentially over $30/share.
Overview
Reading is a holding company formed in 1999; however, its predecessor companies can trace their roots all the way back to the Reading Railroad (made famous by the Monopoly board game) in the pre-Civil War era. In its current form, the company was started when James Cotter Sr. took control of the Reading Railroad in the early 1980s. In 2001, he merged Reading with two of his other holding companies (Craig and Citadel). The merger transformed Reading into what it is today- an international business with major cinema (movie theaters) and real estate holdings in the U.S., New Zealand, and Australia.
Reading’s strategy has been to use its two core segments (cinemas and real estate) to complement each other in a variety of ways.
- Cinemas can be used as anchors for large retail developments, so Reading can use their cinemas to jump start real estate projects.
- Real estate development is often expensive, and the steady cash flows from the cinemas can be used to fund real estate developments.
- Having a background in real estate gives Reading flexibility to convert cinemas into other projects when a movie theater is no longer
