Carmike Cinemas: Potential for Powerful Earnings Growth

Carmike Cinemas’s (NASDAQ:CKEC) Q3 results demonstrate potential for powerful earnings growth. Revenue was $134 million, compared with our estimate of $133 million, and the consensus estimate of $134 million. Adjusted EPS was $0.24, compared with our estimate of $0.26, and the consensus estimate of $0.23, but included an extraordinary tax item related to the Screenvision partnership agreement. Without the special item, EPS would have been $0.41, demonstrating both solid cost control and greater contribution from the Screenvision partnership ($1.3 million in income vs. our $0.6 million estimate) than we had anticipated.

Carmike (NASDAQ:CKEC) continues to exhibit strong cost control. Despite a 7% increase in revenue, the company had lower film exhibition costs (from lower rent on 3D and reduced advertising) and other theater operating costs (from insurance and maintenance and repairs). Should Carmike continue its cost control efforts, each $1 million increase in its operating income contributes roughly $0.05 to EPS.

Strong digital and 3D presence should drive Carmike growth. 94% of Carmike’s screens are digital, providing greater programming flexibility and allowing the company to command higher ticket prices. Carmike increased the number of 3D screens in the quarter to 726 from 591 in Q3 last year, and will include 3D in all new builds going forward. Furthermore, due to its strong digital presence, Carmike is able to shift the films displayed on each of its screens when necessary, maximizing revenues through timing and theater size. For its concessions, Carmike continues to drive revenue with unique promotions.

Expecting a strong Q4. Despite a relatively lackluster October at the box office, we expect November and December box office to show positive growth given the solid upcoming release slate and easy comparisons from a weak Q4 last year. Furthermore, many of the potential blockbusters in Q4 feature 3D debuts, expensive marketing campaigns, and IMAX (NASDAQ:IMAX), increasing the hype and revenue potential for each release further.

Reiterating our OUTPERFORM rating and raising our 12-month price target to $10 from $8.50. Our price target reflects a 5.6x EV/EBITDA multiple applied to our 2012 estimate plus an 8x multiple on $2.5 million in incremental income in 2012 from Screenvision. This is a discount to its peers to reflect the company’s higher debt levels and elevated volatility based on operating results.

Michael Pachter is an analyst at Wedbush Morgan.