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Tuesday, 07/28/2015 7:25:24 PM

Tuesday, July 28, 2015 7:25:24 PM

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Carmike Cinemas Eyes Blockbuster 50% Gain (7/28/15)

Acquisitions, booming concession sales, pricier tickets and rising attendance should lift the stock.

By David Englander

In March, rumors circulated that movie theater operator Carmike Cinemas might be for sale. Its shares surged on the speculation, closing above $34, near an all-time high.

Since then, the stock (ticker: CKEC) has been on a downhill slide. A sale never materialized, and in May, CEO David Passman said Carmike isn’t for sale. On Monday night, Carmike reported second-quarter results that showed film licensing costs were higher than expected, which weighed on earnings. The stock dropped 7.4% Tuesday on the report.

The selloff looks like a buying opportunity. At a recent $24.11, Carmike shares are cheap, trading for an enterprise value of six times 2016 estimated Ebitda (earnings before interest, taxes, depreciation and amortization). That compares to roughly eight times multiples for larger competitors, Cinemark (CNK) and Regal Entertainment Group (RGC).

Wedbush analyst Michael Pachter values the shares at $35, implying eight times his forward Ebitda estimate. That puts the stock’s upside close to 50%.

The nation’s fourth-largest movie theater operator, Carmike has been a big beneficiary of industry consolidation. Over the last two years, through acquisitions, Carmike has grown its theater and screen-count by 10% and 16% to 271 and 2,884, respectively.

With half of the country’s screens controlled by the top five players, the industry can consolidate further, and acquisitions remain a key part of Carmike’s growth opportunity. Management looks to acquire an additional 500 screens.

Carmike has been successful in its concessions business, which has registered 22 consecutive quarters of year-over-year revenue growth. A string of big hits at the box office this year, including Jurassic World, Furious 7, and Minions, has also helped to bring in customers. The upcoming film lineup looks promising, as well.

Carmike operates in mostly rural markets in 41 states, including Alabama, Florida, Georgia, and North Carolina. Movie-ticket sales contribute 62% of revenue, and concessions account for the remainder. This year, analysts expect earnings of $28 million, or $1.10 a share, on revenue of $804 million. In 2016, earnings could grow 30% to $1.44 a share.

In the June quarter, admissions revenue grew 17% from the same period a year ago, outperforming the industry. Strong attendance, and higher ticket pricing drove the growth, helped in large part by an 8% increase in the average screen count.

Concessions revenue, meanwhile, rose 24% from a year ago. That growth reflects initiatives like adding hot food and alcoholic drinks to the menu, and establishing dine-in options at a few of its theaters.

While the increase in film licensing costs caught investors off guard, it wasn’t a complete surprise, given the high concentration of big hit, big-budget movies for which distributors tend to charge more. In the June quarter, 74% of the box office came from the top 10 films, well above the 62% annual average.

While the sale talk has died down, it’s still possible that Carmike could be an acquisition target, as the industry consolidates. Just a few weeks ago, AMC Entertainment (AMC) announced that it was buying Dallas-based Starplex Cinemas, an operator of 33 theaters for $172 million.

In his July investor letter, Chris Mittleman, the chief investment officer of Mittleman Brothers, a longtime Carmike shareholder, wrote that the AMC deal price equates to $497,000 a screen for Starplex. When he applies that multiple to Carmike, he winds up with a price of $44 a share for Carmike’s stock.

Clearly, there’s a lot of value in the company. In time, the stock will reflect that.

http://online.barrons.com/articles/carmike-cinemas-eyes-blockbuster-50-gain-1438119014?mod=BOL_hp_highlight_2&cb=logged0.970496436408341

"Someone said it takes 30 years to be an instant success" - Gabriel Barbier-Mueller, CEO of Harwood International

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