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Why Cinemark Is an Underestimated Profit Investment

February 07, 2014 | About:
Patricio Kehoe

Patricio Kehoe

7 followers

Several big names come to mind when talking about the leisure industry’s motion picture segment. Regal Entertainment Group (RGC) and Carmike Cinemas Inc. (CKEC) are two of the largest competitors. But Cinemark Holdings Inc. (CNK), the third largest company in the U.S circuit, with 298 theatres and almost 4000 screens in 39 states, has been catching up to its rivals and is doesn’t plan on slowing down. So, let’s see what may have motivated investment guru Mario Gabelli (Trades, Portfolio) to recently acquire 10,000 of this company’s shares.

Innovation as a Catalyst for Growth

Cinema attendance in the domestic market has been declining over the past years, given the cheaper video-on-demand options, like Netflix.com Inc. (NFLX), which have been winning over consumers. Therefore, theatres have turned to technological innovation in order to attract a larger customer base, as well as increase concession revenues. And Cinemark is ahead of its competitors in this area, with digital projection technology available in all first-run theatres, and to be extended to all of the company international cinemas by 2014. Apart from also offering the IMAX Corporation (IMAX) and 3D experience, the firms is focusing on its new ‘Movie Bistro’ option, which offers theatre fans luxury seating, gourmet food and other options. The Rave theatres acquired in 2012 were a great contribution to this business model, given their lobby bar and restaurant’s appeal.

These measures are directed mainly at improving the company’s concession sales, which are still its weak point amongst market competitors. Despite revenue boosts consistently above the 6% mark for the past six years (2008 reported $1,742.3 billion, then jumping to $2.5 billion in 2013), in the concession segment, the firm is still well behind. Although 2013 marked a 2.7% increase in revenue per customer, averaging $3.38, Carmike Cinemas, for example, registered $4.09 in concession revenue person. Nevertheless, Cinemark’s international expansion should be able to leverage this disadvantage, as well as create new profit opportunities.

Latin American Margin Boosts

Cinemark has benefitted in the past from its international business segment, and the company’s strategy looking forward will continue to focus on this area. While international box office receipts are currently outperforming the domestic market, the firm has made Latin America its key growth booster. With theatres penetrating several Latin American markets, like Argentina, Brazil, and Chile, the company has a more diverse revenue income stream than its rivals. And so far, success rates have gone up, with 18% revenue increases in the past six years (international business accounts for 30% total company revenue). The strategy has also influenced EBITDA growth figures, which are currently at 11.60% compared to the industry’s 5.7% average, and operating margins have reached a historical 15.5% growth.

Mexico has been one of the target growing markets, reeling in $74 million in revenue for 2012. In order to boost margins for 2014, Cinemark recently sold 31 theatres to Grupo Cinemex, S.A, and Cadena Mexicana de Exhibicion, S.A., and the company plans to add another 117 new theatres in other Latin American regions over the next 3-5 years. With a capital expenditure of $89 million projected for the expansion project, free cash flow could decrease, but the current 19.10% EPS growth, as well as solid 3.2% dividend yield should still be tempting enough for investors. Also, with the company trading at a 9% relative to the industry average of 22.4x, I feel bullish about future profit opportunities.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 3.2/5 (6 votes)

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