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February 06, 2007

Regal Entertainment 4Q06 Preview

Box office comparisons should ease this coming weekend with the fourth installment in the very popular Hannibal Lecter series but the big news this week for Regal Entertainment (RGC) will be the company's 4Q06 earnings report and the likely IPO of its 41% owned joint venture, National Cinemedia (NCMI).

Year to date the box office is down almost 7% against a fairly strong start to 2006. Hannibal Rising, due in theatres this coming weekend, could provide a boost as the first three films in the series averaged $130 million in domestic box office. Eddie Murphy also has his new comedy Norbitin theatres this weekend. Last year the top two movies were around $20 million so the comparison is favorable.

More important to RGC is 4Q06 earnings report due pre-open on Thursday....

With 4Q06 total box office down a little less than 1% and RGC operating 1.5% fewer screens, the top line could be down modestly. Additionally, RGC's quarter ended on December 28th this year vs. December 29th a year ago. The quarter has the same number of days so for 4Q RGC is trading a high volume day of holiday ticket sales for a low volume day at the end of September. According to RGC's Investor Relations department this will cost RGC about 500,000 tickets which works out to around $3 million based on average ticket prices. The consensus revenue estimate is $654 million vs. $668 million a year ago so analysts seem to be on the right track.

Expenses should be tightly controlled so EBITDA should closely track the percentage change in the top line. The consensus EPS estimate calls for 19 cents vs. 23 cents a year ago.

On the call, management is sure to get questions about what it will do with its share the NCMI IPO proceeds as well as it plans for its ongoing share ownership in the newly public entity. As outlined in this post, RGC could receive cash proceeds of almost $4 per share as a results of the IPO with an additional $3 per share in ongoing ownership of NCMI. In the past, RGC has paid large one-time dividends with excess balance sheet cash.

RGC shares have performed very well this year despite the poor start to the box office and the well-known tough comp in 4Q. Consequently, I think expectations about NCMI are high. This might create bad setup if management is unclear on use of proceeds or if the NCMI deal is poorly received. For what it is worth, my best contact thinks the deal is in good shape.

Downside is limited though with 5.3% current yield and the May box office bonanza of Pirates of the Caribbean, Shrek, and Spiderman looming. Therefore, I plan to rise out any downside hoping to get the high end of my long-standing $23-24 target this spring. If I am pleasantly surprised by this week's news, I'll either raise my target or start to scale back my position.

Posted by Steve Birenberg at February 6, 2007 08:09 AM in RGC