Following up my post on Reading (NASDAQ:RDI), I thought it'd be useful to analyze the movie industry. I'm doing this mainly for two reasons 1) to show just how conservative my valuation of Reading was and how much potential upside there could be and 2) to flush out my thoughts on Carmike (NASDAQ:CKEC), which I believe could also be deeply undervalued (though with considerably more risk than Reading).
First up, there are three publicly traded pure plays on the cinema industry- Regal (NYSE:RGC), Carmike (NASDAQ:CKEC), and Cinemark (NYSE:CNK). I'm excluding Marcus Corp (MCS) because it also owns and operates some hotels. Take a look at the following chart to see how industry valuations stake up. (Note: I'm having trouble formatting the table, all of the cells in the title row are shifted one to the left... Sorry!!! If you want to see it properly formatted / are having trouble reading it, you can view it here or see it on my original post)
|# of screens||Market Cap||EV||TTM EBITDA||TTM Revenue||EV / Screen||Revenue / Screen||Ebitda / Screen||Ev / Ebitda|
Note- all numbers from yahoo finance except Reading's EBITDA and Revenue; I only presented Reading's Revenue and EBITDA numbers from the cinema division. Market Cap, EV, EBITDA, and Rev in millions. Also, I did NOT adjust Reading's EV for the ~$15m in debt forgiveness that occurred in their 4th quarter 2010 and is not reflected on their balance sheet yet.
What strikes your eye here? The first thing I pick up on is Carmike looks massively undervalued, and it also looks like their theaters are generating much less than competitors. A quick check reveals why- most of their theaters are in much smaller towns and are smaller theaters, which results in less attendance per screen (Regal's attendance per screen is ~36k per year versus Carmike at ~24k per year per screen). Still, the company is very cheap compared to its competitors.
Looking deeper, it looks like screens of Reading, Regal, and Cinemark's quality are worth somewhere between 600-700k per screen, or around 8 to 9x ebitda. Using the per screen number, Reading's cinema business would be worth ~275m-320m, and on the EBITDA basis its worth between $276m-310.5m. In other words, using publicly traded comps, Reading's cinema business alone is worth almost the entire enterprise value of the company, and a buyer today picks up all of their income producing and undeveloped land completely for free.
Speaking of land, we haven't given the other companies value for their land yet. It's possible they own tons of land sitting on their books at low cost basis, and the ownership of that land is being reflected on the stock price. However, looking into their 10-ks, this isn't the case. Cinemark owns just 43 of their 251 domestic theaters and none of their 130 intl. theaters. Regal owns 65 of their 482 locations. Carmike owns the most, 62 of their 242 locations, but this really isn't that substantial of an amount, and their locations are most likely the least valuable due to their small town / lower traffic locations. Contrast this to Reading, which has a total real estate book value of ~$260m. Most of the book value is operating real estate (1.2 million square feet worth ~$180m book value), generating ~$12m in ebitda per year, and the rest is undeveloped real estate (~$80m of book value), which generate no ebitda but have likely substantially appreciated since the company acquired much of it over a decade ago. In my first post I mentioned that each $10m increase or decrease in asset value would translate into ~$0.44 in value per share. Using that $260 book value number (again, likely too low given the land appreciation), Reading's land value is worth ~$11.40 per share.
So let's look at Reading's valuations using the above numbers. Based on publicly traded comps, Reading's theater business is worth $290m (midpoint valuation). The book value of the land is worth $260m, so the total value of the company would equal $550m. Let's subtract of value $50m for corporate overhead expenses (mentioned in the corporate overhead section of my first post), and the company is worth $500m. After backing out $15m of debt forgiveness (which is not reflected on their 3Q balance sheet), Reading had just over $215m in debt at the end of the 3Q. They also had $24.7m in cash for a net debt position of $191m. Subtracting that from our asset value $500m leaves equity value equal to $309m, and with 22.85m shares outstanding, this translates to per share value of $13.52.
There are some shorter term risks that I thought be worth mentioning. Two near term risks that have developed are the New Zealand earthquakes and a potentially weak 4Q 2010 box office resulting in weaker than expected 4th quarter results.
Reading has ~10% of their assets in New Zealand, including 12 cinemas (64 screens). My understanding is that one of their cinemas was affected by the earthquake, and they have not been able to assess the damage yet. The drop in the New Zealand Dollar could also reduce the value of their other assets. However, because the company is so substantially undervalued and New Zealand represents just 10% of their assets, I'm not going to worry about this. If you're worried about it, we gave the company total asset value of $550m, of which ~$55m will come from New Zealand. Be conservative and apply a 20% discount to those assets, which will result in a loss of value of $11m, or $0.48 per share, and reduce our estimate from $13.52 to $13.04.
The second risk, weaker 4th quarter box office results, is more of a trader's argument and, in my opinion, completely short sighted and over looks just how valuable the company's other assets are. I've read several research reports on the industry that went somewhere along these lines "avoid the cinema stocks, as 4Q 2010 and 1Q 2011 results are likely to be weak due to a weaker than expected box office. However, after the weakness subsides, get more attractive on these names, as 2H 2011 results will likely be strong as a slew of blockbusters will come out." That's just crazy to me. Honestly, I hope Q4 results are terrible and the stock gets slaughtered; I would be happy to add to my position on short term fears.
One thing I will be interested to see in their 4th Quarter results is if they make mention of the Burwood sale or not, either in their press release or their 10k. Based on the sale timeline, I think a sale should happen sometime between March-May. I could, of course, be wrong about the timeline, but I believe the sale (which, depending on its structure and how ownership they retain) should bring in AT LEAST $40m in cash, and likely much more and should serve as a significant near term catalyst to value realization. Management likely won't announce details of the sale until it's completely finalized, but a mention in the 10-K is likely if they are in serious talks / ironing out the details of a sale.
Burwood sale and short term fears aside, I continue to think Reading is materially undervalued and will continue to add shares on any weakness.
Disclosure- Long RDI
Originally posted here