Can These New Releases Prop Up Regal Entertainment?

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

Regal Entertainment (NYSE:RGC) will report Q1:13 results after the market close on Tuesday, April 30, and host a conference call at 1:30pm PT (dial-in: 877-407-0778, webcast: http://www.REGmovies.com).

We expect results in line with our recently revised, below consensus estimates. We expect revenue of $640 million vs. consensus of $654 million, and EPS of $0.12 vs. consensus of $0.14. Our estimates reflect attendance per average screen of down 12 percent partially offset by average ticket price of up 2 percent. We believe the quarter was affected primarily by poor attendance due to a lackluster release slate. We also note that attendance increased nearly 18 percent in Q1:12, which presents a difficult comparison. Regal did not provide guidance.

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Based on a March 28 quarter end, Q1 box office decreased ≈ 10 percent. According to boxofficemojo.com and Regal’s internal estimates, Regal’s fiscal Q1 box office decreased ≈ 10 percent y-o-y. Q1 was up against a strong comp of up 20 percent 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 particularly 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 calculate the concentration of total box office within the top 10 films in Q1 to be roughly flat year-over-year, suggesting stable film rental margins. With that said, the concentration of total box office within the top three films in Q1 is about 200 bps lower y-o-y, so we modeled film rental costs down slightly y-o-y. We believe concession costs will be roughly flat y-o-y in Q1, rising slightly in 2013…

We expect income from National CineMedia (NASDAQ:NCMI) to contribute $0.04 to EPS in Q1. This compares to contributions of $0.08 in Q4 and $0.09 in Q1 of last year.

Looking forward, we expect a stronger release slate through Q2 and Q3 to offset the weak first quarter. We expect a strong release slate in Q2, led by Iron Man 3 and Man of Steel, to drive a positive 5 percent comp during the quarter. Q2 is trending down 10.9 percent quarter-to-date, as the majority of the blockbusters will be released in May and June. We also expect a strong Q3 release slate.

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Maintain our NEUTRAL rating and $17.50 price target. After accounting for Regal’s ownership stake in NCM, we arrive at a $17.50 price target. This reflects a 6.4x EV/adjusted EBITDA multiple on our 2014 estimates, in line with its historical multiple and its peers, reflecting a stable business with high debt levels.

Michael Pachter is an analyst at Wedbush Securities.

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