Yesterday several brokerage firms initiated coverage on recent IPO Cinemark Holdings (CNK), the third largest operator of movie theatres. Not surprisingly, the underwriters are providing favorable coverage including new buy recommendations. A few brokers expressed their preference for CNK over Regal Entertainment (RGC), the largest theatre operator and one of my long positions. The analysts argue that CNK is cheaper than RGC and due its geography it offers more upside potential though organic growth of new theatres. Additionally, CNK has more room for upside in its dividend than RGC given the 51% payout ratio. CNK has a current yield of 3.7% vs. 5.3% for RGC.
These are valid points as CNK trades at under 8 times 2008 estimated EBITDA while RGC trades closer to 9 times. Additionally, most models have no screen growth for RGC while CNK is expected to increase its screen count by about 4% per year taking advantage of population growth in its largest markets of Texas and California, while adding theatres in major metropolitan areas where its is underrepresented. Finally, a little over 20% of CNK’s screens are in Latin America where long-term growth opportunities could be substantial. The organic growth is clearly seen in 2008 estimates (box office comparisons will be extremely tough) where most analysts have RGC’s EBITDA flat to down vs. a 2-4% gain for CNK. It does seem inconsistent for CNK to trade at a discount given the higher internal growth, especially in an industry where everyone pretty much offers the exact same product.
Nevertheless, while I need to do further work on CNK, my initial thought is that I still prefer RGC….

The box office is performing well for the second consecutive year but comparisons will stiffen as we move past the third quarter and 2008 could be a flat to down year. Notwithstanding improved sentiment toward theatres driven by the box office, the emergence of cinema advertising, 3-D releases, and new revenue streams from digital upgrades, I think that the theatre stocks will trade mostly with box office trends as they have over the past few years. With the box office trade is nearing its end, I prefer the more defensive RGC shares.