Can Cinemark Make the Most of These Growth Opportunities?

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

Q1:13 domestic box office ended down 12.4 percent year-over-year due to a quiet release slate and a difficult comparison. Q1:13 was up against a strong +24 percent comp that became progressively more difficult throughout the quarter. January ended down 0.6 percent, led by late-December Oscar-nominated releases. February ended down 24.6 percent due to a quiet release slate. March ended down only 12.3 percent despite a difficult comparison of up 38.1 percent from last year’s release of The Hunger Games. Both March and Q1 were led by Oz: The Great and Powerful.

We estimate that international admissions revenue was up 7 percent in Q1. According to our estimates, Cinemark’s (NYSE:CNK) international circuit was up 10 percent in U.S. dollars year-over-year, while in local currency the circuit was up 3 percent year-over-year.

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Adjusting the timing of slated 2013 transactions. We initially anticipated that the Rave acquisition of 32 theaters and 483 screens would be completed in Q1, but now expect the transaction to close in Q2 or later. Additionally, after discussions with management, we have shifted the sale of 31 theaters including 290 screens in Mexico to Q3 from Q2. We note that closing dates have not yet been announced.

We have expanded our model for a closer look at domestic and international margins. Our model now details domestic and international margins for film rental costs, concession costs, lease expenses and other operating expenses, in order to create more accuracy in our estimates and highlight regionally-specific trends. Page 2 in our report details our thoughts on margin trends by segment…

We are revising our 2013 estimates for revenue to $2.60 billion from $2.59 billion vs. consensus of $2.67 billion, for adjusted EBITDA to $593 million from $588 million vs. consensus of $622 million, and for EPS to $1.78 from $1.66 vs. consensus of $1.78. We are initiating 2014 estimates for revenue of $2.80 billion vs. consensus of $2.89 billion, adjusted EBITDA of $643 million vs. consensus of $685 million, and for EPS of $2.00 vs. consensus of $2.09.

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Maintaining our NEUTRAL rating and raising our price target to $29 from $26 on our new 2014 estimates. After accounting for Cinemark’s ownership stake in National CineMedia (NASDAQ:NCMI), we arrive at a $29 price target, which reflects a 6.3x EV/EBITDA multiple on 2014 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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