Regal Entertainment Group Earnings Preview: Deep Stock Analysis

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

Regal Entertainment (NYSE:RGC) will report its Q3:12 results after the market close on Thursday, October 25, and host a conference call at 1:30pm PT (dial-in: 877-407-0778, webcast:

We expect results in line with our recently revised estimates.  We expect revenue of $711 million compared to consensus of $719 million, and EPS of $0.15 compared to consensus of $0.17. Regal did not provide guidance.

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Based on a September 27 quarter end, Q3 box office decreased ≈ 5% y-o-y for Regal, according to Late June releases performed above expectations, but July releases mostly disappointed. The Dark Knight Rises was the standout summer blockbuster, as expected, but was negatively impacted by the Colorado incident. August was plagued by cannibalization from the Olympics and a generally weak box office, while September releases were uncompelling.

We expect film rental costs to be up, pressuring margins due to a higher concentration of total box office within the top ten movies. We expect film rental costs as a percentage of admissions revenue to be 53.3%, up 20bps y-o-y.

We expect income from National CineMedia (NASDAQ:NCMI) to contribute $0.03 to EPS in Q3. This compares to contributions of $0.00 in Q2 and $0.04 in Q3 last year.

We expect $10 million in net other expenses, down from $13 million last year. We estimate a $13 million charge for Open Road Films (“ORF”) in Q3 based on its disappointing Q3 release  Hit and Run, and marketing spend for late September release End of Watch. We expect at least $3 million in contribution rom DCIP to partially offset Q3 ORF charges. We anticipate continued benefit from DCIP, and expect contribution from  End of Watch box office receipts in Q4 and  solid contribution from DVD sales in Q1:13.

Q4 quarter-to-date box office is tracking up 33%. Taken 2 has been the surprise hit of October, earning over $105 million in its first three weeks, compared to last year’s Real Steel, which earned ≈ $85 million over the same period. We expect the Twilight finale to lead November and The Hobbit to lead December releases. We view our Q4 box office estimate of up 6.2% as conservative.

Maintain our NEUTRAL rating and $15 price target. After accounting for Regal’s ownership stake in National CineMedia, we arrive at a $16 price target. This reflects a ≈ 6x EV/adjusted EBITDA multiple on our  2013 estimates, below its historical multiple of 6.3x 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 Securities. 

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