Regal Entertainment: Check These Cost Controls

Regal Entertainment Group (NYSE:RGC)’s Q1:12 profits once again beat expectations due to effective cost control. Admissions revenues per average screen were 120 basis points above industry box office growth of 20.5% in Q1, but the $0.12 beat relative to our Streethigh estimate was primarily due to superb cost control. Revenue was $685 million, compared with our estimate of $681 million, and the consensus estimate of $665 million. EPS was $0.30, compared with our estimate of $0.18, and the consensus estimate of $0.14. The company once again provided no forward guidance.

We are increasing our FY:12 estimates for revenue to $2.9 billion from $2.8 billion and increasing our estimate for EPS to $1.03 from $0.78 to reflect Q1 upside and lower expenses. We are maintaining our FY:13 estimates for revenue of $2.9 billion, but are increasing our EPS estimate to $1.06 from $0.87 to reflect our expectation that the company can continue to rein in costs.

The solid start to 2012 alleviates any pressure we earlier feared with respect to Regal’s cash position. Regal’s debt level is high, and we had earlier expressed concern that a downturn in box office could limit its ability to maintain its dividend. The better-than-expected start to the year provides an additional buffer against potential weakness during the balance of the year, beyond curbing capex in 2012.

Open Road Films, Regal’s studio partnership with AMC, has released four films to date and expects to generate a profit for each of the four films. We expect each Open Road movie to reach profitability as it enters its DVD window, as each will generally be lower budget movies, and will likely perform in line with marketing dollars spent. The company expects four more releases during 2012.

Management is committed to returning capital to shareholders. The company is committed to its annual dividend of $0.84 for the foreseeable future. Based upon the earnings level in Q1, it appears that Regal’s business is sufficiently predictable and controllable to cover debt service and dividends.

Maintaining our NEUTRAL rating while raising our price target to $16 from $14 to reflect a lower cost base. After accounting for Regal’s ownership stake in National CineMedia, we arrive at a $16 price target. This reflects a 6.3x EV/Adjusted EBITDA multiple on our new 2013 estimates, in line with its historical multiple and in line with its peers. In our view, this multiple reflects a stable business with low growth, while also reflecting debt levels.

Michael Pachter is an analyst at Wedbush Morgan.