Movie Theater Stocks: 2 Blockbusters, 1 Box-Office Bomb

It’s summertime in the cinema world — and in the wake of early hits Star Trek: Into Darkness and Fast & Furious 6, would-be blockbusters like Despicable Me 2 and The Wolverine are gearing up to do battle at the box office. But the box office itself — at least from the standpoint of investors — is drawing mixed reviews as the movie theater industry struggles to overcome myriad challenges.

There are three major publicly traded U.S. movie theater chains: Regal Entertainment Group (RGC), Cinemark Holdings (CNK) and Carmike Cinemas (CKEC) — second-place AMC Theaters is privately owned. Industry trends impact all of these companies, and pose a good news/bad news proposition for investors right now.

The good news: The U.S. movie theater sector took in record revenue of $10.8 billion last year according to industry figures. That translates into a whopping 1.36 billion tickets sold — the first sales increase in three years — driven by boffo results from hits like The Avengers and The Hunger Games.

The bad news: That figure still reflects a scant annual growth rate of 0.2% — and analysts consistently have forecast declining revenues in the industry as consumers increasingly opt to bypass the theaters and wait for hot movies to hit the rental market. Because of high debt and hot competition from alternatives like Netflix (NFLX) and Coinstar’s (CSTR) Redbox — not to mention original programming on cable — movie theater chains increasingly are struggling to stay ahead of the curve.

But despite the ill winds swirling around the industry, rumors of movie theater chains’ death are premature. In fact, of the three majors, two still are worth your investment buck. So, here’s a look at two of the sector’s potential blockbusters, as well as the potential box-office bomb.

The Blockbusters

Regal Entertainment Group: When it comes to summer blockbusters, it’s go big or go home. The same can be said for movie theater chains. RGC is the nation’s largest chain, boasting more than 7,300 screens in 570 theaters in 42 states and U.S. territories. Despite a 2-cent EPS miss in the most recent quarter, Regal’s fiscal third quarter likely will get a bounce from monster May box-office hits like Iron Man 3 — not to mention strong premieres during the rest of June.

RGC is upgrading its theaters and recently announced an offering of $250 million in senior notes. However, what I really like is Regal’s combination of value and income potential. RGC currently yields a sweet 4.7%, with cash no issue as illustrated by operating cash flow of $340 million. All the while, it boasts a forward price-to-earnings ratio of 16, which isn’t too far out of line with the rest of the sector. I’m confident that Regal and its stock alike will deliver in the next quarter.

Cinemark Holdings: CNK, the nation’s third-largest theater chain, operates more than 5,200 screens across 460-plus theaters in the U.S. and Latin America. The company’s first-quarter earnings of 24 cents a share beat the Street consensus by 4 cents, though revenue slipped 5.4% year-over-year.

Cinemark also is beefing up its theaters, investing in super-sized 72-foot XD screens and expanded food options. It also will benefit from its $240 million acquisition of 32 theaters and 483 screens from Rave Cinemas in a deal finalized last month.

While CNK’s 2.9% yield doesn’t stand up to Regal’s, it’s nothing to sneeze at, and it’s far more attractive on a valuation basis. Not only does CNK trade at 14 times next year’s earnings, but it also sports a price/earnings-to-growth ratio of 1.3 (suggesting it’s slightly overbought), compared to a whopping 4 for RGC. If you’re looking for income, RGC looks better, though Cinemark has a better shot at delivering near-term growth — particularly in light of the Rave deal.

The Box-Office Bomb

Carmike Cinemas: Carmike is much smaller than its major rivals, with only 2,500 screens in about 250 theaters in 35 states — most located in smaller communities. Its most recent quarterly earnings included a 33-cent loss, disappointing analysts, who had expected a 7-cent profit. CKEC’s operating expenses surged during the period in part due to its acquisition of 16 former Rave theaters last October for $19 million in cash and $100 million in assumed lease obligations.

Although Carmike shares have zoomed up 62% in the past year — outpacing even the nearly 40% gains in RGC and CNK — both its forward P/E of 14 and its 1.7 PEG aren’t wholly out of whack. My concern with CKEC actually is the size of its markets — many small-town theaters might not be able to price as aggressively as their big-city peers. And that gives me pause on Carmike right now.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

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