Here’s Why Carmike Cinemas Is Headed Up

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

Carmike (NASDAQ:CKEC) revenue was in line, but higher costs triggered an unexpected loss. Revenue was $130 million, vs. our estimate of $128 million and consensus of $130 million. Adjusted EBITDA was $17 million, vs. our estimate of $24 million and consensus of $22 million. Adjusted EPS was $(0.20) (excluding $0.13 per share in one-time charges), vs. our estimate of $0.10, and the consensus estimate of $0.07.

Positive per cap metrics helped offset admissions revenue decline. Admission revenue per average screen was down 10.8 percent vs. our estimate and the industry average of down 12.4 percent, driven by average ticket of up 2.6 percent vs. our estimate of down 1.5 percent, while attendance per average screen declined 13 percent vs. our down 11 percent estimate. Additionally, concessions and other revenue per cap were up 6.9 percent, slightly below our aggressive up 7.5 percent estimate.

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Expense deleverage led to the Q1 miss. Film rental costs were 53.1 percent, 90 bps above our estimate, primarily due to additional advertising costs associated with new builds. Concession costs were 12.3 percent, 100 bps above our estimate, due to promoting and discounting to drive higher gross profit dollars on its concessions. Other theater operating costs increased substantially primarily due to the Rave acquisition, however on a per screen basis were in line with Q1:12. We expect that as it grows its footprint, Carmike will leverage G&A and other theater operating costs, and will gain some leverage with the studios to drive film rental costs lower.

We expect Q2 to end up 5 percent despite a slow April. Q2 quarter-to-date box office is trending down 7.5 percent after April ended down 12.2 percent. May and June include several blockbuster releases, which we expect to drive the rebound.

We are raising our FY:13 estimates for revenue to $606 million from $593 million based on organic screen growth, while adjusted EBITDA decreases to $110 million from $118 million, and EPS to $0.81 from $1.20 to reflect Q1 results and an elevated cost structure. Our FY:14 estimates for revenue increase to $665 million from $644 million, and adjusted EBITDA to $134 million from $132 million, while our estimates for EPS decrease to $1.55 from $1.60.

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Reiterating our OUTPERFORM rating and $21 price target. Our price target reflects 5.5x EV/EBITDA multiple applied to our 2014 estimate, below its peers and slightly below its historical multiple, which we view as prudent given the fluctuation in operating results. We believe there is upside to our price target given the potential for substantial earnings upside should revenue surpass expectations. Further acquisitions in 2013 and 2014 would be incremental to our estimates.

Michael Pachter is an analyst at Wedbush Securities.

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