The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Carmike Cinemas (NASDAQ:CKEC) will report its Q3:12 results after the market close on Tuesday, October 30, and will host a conference call at 2:00pm PT (dial-in: 800-736-4610, webcast: www.carmikeinvestors.com).
There may be upside to our estimates for revenue of $127 million and EPS of $0.24. The consensus revenue estimate of $136 million appears to account for Carmike’s again outperforming the industry in Q3 on higher average ticket prices. Our EPS estimate is above consensus for EPS of $0.19, as we believe Carmike can control its expenses. Additionally, we expect earnings from its Screenvision partnership slightly above last year, at $1.5 million for Q3.
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We expect slightly higher film rental costs in Q3 given a higher concentration of box office receipts within the top ten films. We are modeling film rental costs of 54.9% in Q3, 30bps above Q3:11.
Carmike recently revised its capital structure, offering it the flexibility to begin expanding its footprint. In Q2, Carmike completed a secondary offering, raising ≈ $56 million, sold $210 million in senior secured notes, and opened a new $25 million revolving credit facility. The proceeds were primarily used to retire its existing debt, strengthening the company’s balance sheet to position it for growth through new theater builds and small acquisitions, the first of which is slated for Q4.
Carmike will acquire 251 screens in Q4. Including capital leases, debt from the acquisitions increases by $100.3 million, and the company will spend $19 million in cash for the 16 theaters, raising enterprise value by $120 million. We expect no additional capital expenditures, and expect synergies to positively impact financials in 2013. After adjustments, we expect 2013 adjusted EBITDA of $115 million.
Q4 quarter-to-date box office is tracking up 20%. Taken 2 has been the surprise hit of October, earning over $105 million in its first three weeks, compared to last year’s Real Steel, which earned ≈ $85 million over the same period. We expect the Twilight finale to lead November and The Hobbit to lead December releases. We view our Q4 box office estimate of up 6.2% as conservative.
Reiterating our OUTPERFORM rating and $21 price target. Our price target reflects a 5.8x EV/EBITDA multiple applied to our 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 4.8x multiple.
Michael Pachter is an analyst at Wedbush Securities.
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