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March 22, 2007

National Cinemedia: Initial Research Observations

The underwriters of the National Cinemedia (NCMI) IPO launched coverage this week. NCMI is the largest company in the rapidly growing cinema advertising industry and is 22% owned by Regal Entertainment (RGC). RGC is widely held throughout the Northlake client base.

In general, analysts are looking for modest additional upside in this well received IPO. The story is that cinema advertising has lots of room to grow because inventory sellouts can rise and CPMs are too low. Furthermore, an argument can be made that cinema advertising has room to take share of the advertising pie. In the UK this medium represents 1.4% of all advertising expenditures vs. just 0.2% in the US. Given studies showing that cinema advertising has very high recall rates and the fact that younger consumers make up the largest groups of ticket buyers, it seems plausible that cinema advertising will be one of the fastest growth areas of ad budgets.

NCMI further benefits as it gains access to more theatres....

NCMI and cinema advertising are being compared favorably to outdoor advertising as there is no way to avoid either. And like outdoor advertising stocks, NCMI is trading at a lofty multiple. Therefore, unfortunately I have to conclude that the favorable fundamental story, with which I agree, is already reflected in the shares which trade at an upper teens multiple of EBITDA. Cinema advertising deserves a premium but that is too rich for my blood.

One set of data from the Merrill Lynch initiation particularly caught my eye. People aged 12-17 buy 18% of all movie tickets but represent 8.8% of the US population and people aged 18-24 buy 19.5% of all movie tickets and represent 10% of the population. No wonder advertisers are anxious to increase their use of cinema advertising. These are some of the most valued demographic segments and are typically tough to reach. Sitting in a theatre, the advertisers has these potential consumers all to themselves.

As an aside, if you ever wondered why some movies that are critically panned perform very well, your answer is right here – almost 40% of movie tickets are sold to young adults. I'm not saying these folks don't have good taste, just that the entertainment experience they are seeking is probably far different than that of movie critics and most baby boomers.

Posted by Steve Birenberg at March 22, 2007 10:21 AM in RGC