Cinema Operators Are Undergoing Cyclicality

Regal Entertainment remains steadfast

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Aug 16, 2017
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Regal Entertainment (RGC, Financial), the $2.73 billion Tennessee-based parent company of Regal Cinemas, reported a 0.8% revenue increase year over year to $1.59 billion and a contrasting (-)3% profit decline to $72 million in the first half of the year (4.5% margin vs. 4.7% in the year prior).

Overall expenses rose by 0.78% while the company received lower recognized profits in National CineMedia and from other nonconsolidated entities thus resulting in lower profits. National CineMedia provides in-theater advertising for its theatrical exhibition partners, which are Regal Entertainment, AMC Entertainment (AMC, Financial) and Cinemark (CNK, Financial).

“Both our ongoing seating and concession initiatives and our acquisition of 134 high-quality screens had a positive impact on our operating results in the second quarter, including record highs in average ticket price and concession sales per patron.

“With year-to-date industry box office revenue in line with last year’s record total and an exciting film slate yet to come in the back half of the year, we remain optimistic regarding the potential for box office success in 2017.” – Amy Miles, CEO of Regal Entertainment Group

Valuations

Regal Entertainment is undervalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio 16.3 times vs. the industry median of 22.9 times and a price-sales (P/S) ratio of 0.85 times vs. 2 times.

The company had negative book value in the past decade resulting in no price-book (P/B) ratio.

Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 0.84 times and 16.6 times.

Total returns

Regal Entertainment failed to deliver any positive returns this year with (-)13.35% compared to Standard & Poor's 500 index’s 10.4%.

Regal Entertainment Group

Regal Entertainment Group is the parent company of Regal Entertainment Holdings Inc., which is the parent company of Regal Cinemas Corp. and its subsidiaries.

Regal Cinemas' subsidiaries include Regal Cinemas Inc. and its subsidiaries, which include Edwards Theatres Inc., Regal CineMedia Corp. and United Artists Theatre Co.

Regal Entertainment operates one of the largest and most geographically diverse theater circuits in the U.S., consisting of 7,267 screens in 561 theaters in 42 states along with Guam, Saipan, American Samoa and the District of Columbia as of December 2016, with approximately 211 million attendees.

Regal Entertainment targets prime locations with access to large, high patron traffic areas. Further, the company operates its theater circuit using its Regal Cinemas, United Artists, Edwards, Great Escape Theatres and Hollywood Theaters brands through its wholly owned subsidiaries.

The company manages its business under one reportable segment: theater exhibition operations.

Metrics (some)

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Attendance

In the first half, attendance in Regal declined by (-)3.6% year over year 100.8 million.

Average ticket price

In the first half, average ticket price increased by 2.97% year over year to $10.06.

Average concessions per patron

In the recent half, concessions per patron climbed 4.94% to $4.67.

Sales and profits

In the past three years, Regal recorded revenue growth average of 1.7%, profit growth average of 2.6% and profit margin average of 4.6%.

Cash, debt and book value

As of June, Regal Entertainment had $235.5 million in cash and cash equivalents and $2.46 billion in debt with negative equity (-)$835 million. Overall equity increased by $37 million year over year while debt climbed $142 million.

Of Regal’s $2.75 billion assets 14.6% were identified as goodwill and intangibles while book value has remained negative at (-)$835 million compared to (-)$872.3 million the year prior.

Cash flow

In the first half, Regal Entertainment’s cash flow from operations declined by (-)13% year over year to $207.8 million brought by lower profits and higher cash outflow in its prepaid expenses, accounts payable among others.

Capital expenditures were $104.3 million leaving Regal Entertainment with $103.5 million in free cash flow compared with $149.4 million the year prior. The company allocated 67.4% of this free cash flow in dividend payouts and took in $137.3 million in borrowings from credit facilities net repayments.

The cash flow summary

In the past three years, Regal allocated $558 million in capital expenditures, reduced its debt by $86 million (net issuances), generated $637 million in free cash flow and paid out $585 million in dividends with a payout ratio of 95.3%.

Conclusion

The cinema industry and its associated exhibitors, such as AMC Entertainment, Regal Entertainment among others, have not performed very well post-quarterly earnings report.

Ripe with competition from DVD, BluRay and Netflix (NFLX, Financial) among others, Regal stated in one of its filings that the overall domestic motion picture industry historically has maintained steady long-term growth in revenues and attendance albeit is susceptible to cyclicality.

Meanwhile, unlike AMC with significant acquisitions in recent years that helped increase its business revenue growth, Regal Entertainment exhibited sub-one percentage point revenue growth in the recent half of operations while average analyst expectations indicate a near midsingle-digit earnings-per-share decline this fiscal year.

In addition, the company has maintained a heavily leveraged balance sheet while at the same time having been overly generous to its shareholders in recent years in terms of dividend payouts.

Average analysts have an overweight recommendation on Regal Entertainment with a target price of $22.36 vs. $17.41 at the time of writing. Using average revenue estimates with three-year P/S and a 20% margin indicated a per share figure of $16.

In summary, Regal is a pass.

Disclosure: I do not have shares in any of the companies mentioned.