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July 28, 2006

Regal Entertainment Earnings Preview

Ahead of Monday's earnings report, shares of Regal Entertainment (RGC) are within 1% of their 2006 high and up almost 9% so far this year. Given the $1.20 annual dividend, the total return is even better. Coming off the dismal 2005 box office performance, RGC shares have responded to renewed growth in attendance and revenue in 2006 and to the growing likelihood of a liquidity event for its 49.9% owned joint venture, National Cinemedia. I think 2Q earnings and commentary about 3Q trends will move the shares even higher and stand by my target of $23-24.

RGC is expected to report EPS of 27 cents, revenues of $685 million, and EBITDA of $154 million for 2Q06. I think there is modest upside to the numbers because the implied revenue growth is 6% while the box office rose 8% in the quarter according to BoxOfficeMojo.com....

As the largest theatre owner in the US, RGC's revenue trends generally track overall industry growth closely. Additional upside could come from the fact that RGC is operating 1% more screens this year. Also, per capita spending on concession could be up slightly.

If I am correct that revenues will come in above some analyst estimates, there could be upside from operating leverage. Expense growth is only expected in the mid-single digits and concessions have an 85% margin, so even a small positive surprise on the top line could flow through down the income statement.

I also think that commentary related to 3Q06 could be favorable relative to current consensus estimates that call for just 3% revenue growth. Thanks almost entirely to Pirates of the Caribbean: Dead Man's Chest, quarter to date box office is up 15%. Comparisons stiffen slightly over for August and September but if the rest of the quarter is just flat with a year ago, 3Q box office would rise 6%.

Beyond theatre level fundamentals, investors will also be hoping to hear about possible plans for an IPO of National Cinemedia. Analysts believe this event could lead to a substantial special dividend of several dollars per share based on RGC's past practice. I think 2006 IPO is partially built in to RGC shares so commentary on this subject could impact the stock price as much as box office related trends.

Posted by Steve Birenberg at July 28, 2006 09:37 AM in RGC