The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Q3 domestic box office results were down 6.9%, well below our up 1.2% estimate. According to boxofficemojo.com, domestic box office results for the quarter ended September 30 were down 6.9% compared to our up 1.2% estimate. Regal’s (NYSE:RGC) quarter ended September 27, resulting in Q3 box office down ≈ 5%. We are lowering our Q3 estimates for the exhibitors to reflect final box office figures. We are lowering Q3 revenue estimates for Regal to $711 million from $752 million, for Cinemark (NYSE:CNK) to $630 million from $666 million, and for Carmike (NASDAQ:CKEC) to $127 million from $141 million.
The few Q3 hits did not offset a number of misses at the domestic box office. July began well, with late-June releases performing above expectations, but July releases mostly disappointed. The Dark Knight Rises was the standout summer blockbuster as expected, but was negatively impacted by the Colorado incident. August was plagued by cannibalization from the Olympics and a generally weak box office, while September releases were uncompelling.
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We estimate that Latin American box office trended down in Q3 in U.S. dollars, while trending up in local currency. According to boxofficemojo.com and our calculations, Brazil was down 18% in dollars, but up 3% in local currency, while Mexico was down 9% and flat, Argentina was up 27% and up 39%, Colombia was up 2% and up 3%, and Peru was down 4% and down 9%, respectively. After weighting each market, we estimate that Cinemark’s combined Latin American markets were up 2% in local currency after accounting for the additional theaters Cinemark acquired in the region in the last year.
We expect film rental costs to be higher than we had modeled due to a higher concentration of total box office within the top ten movies. We increased our estimate for film rental costs for our covered exhibitors due to a higher-than-expected concentration of total box office within the top ten movies, driven largely by The Dark Knight Rises and The Amazing Spider-Man.
We believe NCM’s contribution to Regal and Cinemark is tracking in line with our estimates, and believe Screenvision’s contribution to Carmike for Q3 is also tracking in line. We expect a slight decline in contributions to Regal and Cinemark from NCM based on NCM’s latest 10-Q filing. We expect a slight increase for Screenvision’s contribution to Carmike based what we believe is an improving business model with further room for growth. We also note that Cinemark is in the early phase of developing an in-house advertising model similar to NCM for its theaters in Latin America, called Flix.
We are lowering our Q3 adjusted EBITDA estimates for Regal, Cinemark and Carmike to reflect these changes. We are lowering our Q3 adjusted EBITDA estimates for Regal to $126 million from $161 (compared to consensus of $130 million), for Cinemark to $136 million from $158 (compared to consensus of $141 million), and for Carmike to $20 million from $24 (compared to consensus of $21 million). We expect consensus estimates to decline further, given box office results.
We raised our 2013 estimates for box office receipts for 2H:13 to reflect easier comparisons. We raised our estimate for box office receipts for Q3 2013 to 8.2% from prior 2.0% based on an easier comparison from the difficult current quarter, driven largely by the absence of the Olympics next year and a potentially more robust release slate.
Carmike will acquire 251 screens this quarter. Including capital leases, debt from the acquisition increases by $100.3 million, and the company will spend $19 million in cash for the 16 theater complexes, raising enterprise value by $120 million. We expect no additional capital expenditures, and expect synergies to positively impact financials in 2013. After all adjustments have been made, we now estimate 2013 adjusted EBITDA of $115 million, ≈ $24 million above 2012.
We maintain our NEUTRAL rating and $15 price target for Regal. After accounting for Regal’s ownership stake in National CineMedia, we arrive at a $15 price target. This reflects a ≈ 6x EV/adjusted EBITDA multiple on our revised 2013 estimates, below its historical multiple of 6.3x and in line with its peers. In our view, this multiple reflects a stable business with low growth, while also reflecting debt levels. Regal is currently trading at a 5.8x multiple.
We maintain our NEUTRAL rating and $24 price target for Cinemark. After accounting for Cinemark’s ownership stake in National CineMedia, we arrive at a $24 price target, which reflects a 6.1x EV/EBITDA multiple on 2013 estimates. Cinemark’s multiple reflects its growing international footprint and lower debt ratios, while maintaining our caution given its dependence on economic growth in Latin America. Cinemark is currently trading at a 5.9x multiple on our 2013 EBITDA estimate.
We reiterate our OUTPERFORM rating and $21 price target for Carmike. Our price target reflects a 5.8x EV/EBITDA multiple applied to our revised 2013 estimate, below its peers, but in line with its historical multiple, plus ≈ 7x applied to $3 million in incremental income we project in 2013 income from Screenvision. We believe there is upside to our price target given the potential for substantial earnings upside should revenue surpass expectations. Carmike is currently trading at a 4.6x multiple.
Michael Pachter is an analyst at Wedbush Securities.
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