Cinemark Holdings: Updated Stock Analysis for Shareholders

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Q4 quarter-to-date box office is trending up 18%. October was up 10%, led by Taken 2, and November month-to-date is up 24% due to new releases Skyfall and the final Twilight film. The coming weekend may be relatively weak due to a dearth of new releases, but December should be in line with our raised estimates as The Hobbit compares positively to last year’s Sherlock Holmes: A Game of Shadows.With that said, our estimate assumes some deceleration in December.

Our Q4 revenue estimate goes to $622 million from $579 million, our Q4 EBITDA goes to $141 million from $124 million, and  our Q4 EPS estimate goes to $0.41 from $0.31.  Our 2013 estimates remain unchanged.

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Notwithstanding a likely very solid Q4, Q1:13 is up against a strong +24% comp.  We expect a negative comp in Q1.

We estimate that Latin American box office is trending up on par with U.S. box office in Q4 in U.S. dollars. According to boxofficemojo.com and our calculations, and after weighting each market, we estimate that Cinemark’s (NYSE:CNK) combined Latin American markets will end up at least 10% in local currency in Q4.

Cinemark recently announced that it will acquire 32 theaters including 483 screens. Cinemark will acquire the screens from Rave Cinemas for $240 million, funded by available cash, its existing credit facilities, the issuance of additional debt securities, or a combination thereof. We assumed a year-end close.

The acquisition increases enterprise value by $240 million and we expect contribution of at least $41.7 million to Adjusted  EBITDA in 2013, so Cinemark paid ≈≈≈5.8x EBITDA. Net debt increases by $240 million as a result of the acquisition, and the trailing twelve months Adjusted EBITDA of the theaters to be acquired was $41.7 million. We assume no additional capital expenditures will be required, and expect synergies that will positively impact financials in 2013, so we estimate that Adjusted EBTIDA will increase by ≈$50 million in 2013.

Maintaining our NEUTRAL rating and $26 price target. Our price target reflects the positive impact of the acquisition, while maintaining caution given an increase in Cinemark’s increased net debt position. After accounting for Cinemark’s ownership stake in National CineMedia (NASDAQ:NCMI), we arrive at a $26 price target, which reflects a 6.3x EV/EBITDA multiple on 2013 estimates, in line with its historical multiple and peers. We maintain Cinemark’s multiple to reflect  its growth opportunities domestically and internationally, balanced with increasing  net debt and our caution given its dependence on economic growth in Latin America.

Michael Pachter is an analyst at Wedbush Securities.

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