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April 27, 2007

Regal Entertainment Has A Great First Quarter

Regal Entertainment (RGC) shares rose 4% following better than expected 1Q07 earnings. RGC was able to convert the strong 1Q box office into better margins and EBITDA which bodes very well for the next two quarters when the box office should be record breaking. The shares have now regained more than the $2 special dividend paid earlier in April with proceeds of the National Cinemedia (NCMI) IPO. I think box office momentum can drive RGC to $23-24 at which point I expect to be a seller as comps will be tough in 2008. Since I started buying RGC for clients a little over year the company has paid $3.20 in special and quarterly dividends on top of $1.60 in share appreciation. The total return is 24%. Not bad for the supposedly comatose movie theatre industry.

RGC rode a 7% gain in domestic box office to a gain of over 8% in its own 1Q admissions revenue as a favorable mix of PG-13 and R-rated films led average ticket prices to be higher than expected. Coupled with good expense control, the revenue upside pushed operating margins a little above expectations as well. Better than expected EBITDA was the result and this is the key financial measure investors in theatres focus on....

One other item noted by management that helped this quarter and could be a boost ii future years is the increasing use of new 3D technology in theatres. Meet The Robinsons performed much better and at premium ticket prices. RGC plans to retrofit a few hundred theatres for 3-D in anticipation that recent announcements by studios of 3-D movies will come to fruition.

Management also noted on the call that some of the excess funds held following the NCMI IPO will probably be spent on acquisitions. This could be good news as it is an easy way to push cash flow up a higher, sustainable level so that the annual dividend can be increased. I don’t think RGC would raise the annual dividend just because 2006 and 2007 box office performance showed so much improvement.

All eyes now turn to May which kicks off the summer season with Spiderman 3, followed by Shrek 3, and then Pirates 3 on Memorial Day weekend. Last May got off to a horrible start so the comparisons are very easy against three of the biggest franchises of all-time. I think RGC shares will rally further into Memorial Day weekend.

Posted by Steve Birenberg at April 27, 2007 01:03 PM in RGC