Cinemark Holdings Outlook Revised Lower
We are revising Q4 estimates based on disappointing domestic box office results at Cinemark Holdings (NYSE:CNK). We are lowering our Q4 revenue estimate to $547 million from $578 million due to Q4 (ending December 31) box office results of down 5.3%, according to BoxOfficeMojo.com. Our admissions per screen estimate for Cinemark is in line with the industry average. Our Q4 EPS estimate goes to $0.28 from $0.31.
We are revising our 2012 estimates based on lower attendance assumptions and lower average ticket price with slower growth for 3D. We are lowering our 2012 revenue estimate to $2.44 billion from $2.57 billion on lower box office assumptions. We also believe that average ticket price could be lower than we anticipated due to a lower mix of 3D given the lackluster attendance displayed by consumers in Q4. Our 2012 EPS goes to $1.50 from $1.65 as a result.
After an analysis on film rental costs and concession costs, we are raising gross margin assumptions for Q4 and 2012. As explained in our corresponding Movies and Entertainment industry note, we revised the way we approach gross margin in our models. We believe that due to Cinemark’s international footprint, the company has been able to keep its margins stable relative to its peers. We suspect that this is due to more favorable film rental costs and an irregular release schedule in Latin America that tends to offset higher domestic film rental costs. As a result, we lowered Q4 film rental costs to 54.0% from 55.7% and 2012 film rental costs to 54.5% from 55.2% to be in line with its historical rates.
Despite lowering our box office projections and 3D mix assumptions for 2012, we believe there could be upside to our numbers and suspect that the general perception of declining box office is overdone. In our corresponding Movies and Entertainment industry note, we discuss industry growth over the long term and where we believe the industry is headed in 2012. In short, we believe that while 2011 was disappointing in relation to 2009 – 2010, it was in line with long term growth rates the industry has enjoyed since the days of E.T. We suspect that growth may continue at a rate faster than what we have modeled for 2012.
Maintaining our NEUTRAL rating but lowering our price target to $22 from $24 to reflect lower 2012 box office assumptions. After accounting for Cinemark’s ownership stake in National CineMedia, we arrive at a $22 price target, which reflects a 6.0x EV/EBITDA multiple on 2012 estimates. We believe Cinemark’s multiple is warranted given its growing international footprint and lower debt ratios.
Michael Pachter is an analyst at Wedbush Morgan.