AMC, CKEC, CNK, and RGC have not behaved the way we thought they would since the last time we discussed them. So we thought we should conduct more detailed valuation of the companies rather than just a back-of-the-envelope calculation. We note that we were long in 3 of these names and realized good returns, but it appears that we got out too soon. Then again the entire market has gone up and up and ... yes, up.
While the movie theatre space is
mature with intense outside competition, its main participants are growing
revenues at modest rates, continue to generate positive cash flow, and remain
profitable. Most of them are also
rewarding shareholders with dividends.
We will touch on the industry and the challenges it is facing today and
going forward. Then we will discuss four
of its major players - Regal Entertainment Group (RGC), AMC Entertainment
Holdings (AMC), Cinemark Holdings (CNK), and Carmike Cinemas (CKEC). Based on our valuation of the companies we
think AMC is fairly valued, RGC and CNK are under-valued, and CKEC is slightly over-valued.
Introduction
The U.S. movie theatre industry,
with total annual revenues of approx. $15bil, is a mature one facing a lot of
competition in terms of content delivery, availability of content, and
pricing. Simply put, more and more
substitutes for the movie theatres are popping up. The larger players in this space have taken
steps to address the competition and hopefully to accelerate growth.
In attempting to differentiate
themselves, movie theatres have increased their capital expenditure to enhance
their theatres (upgrade sound systems, install reclining seats, etc.) and
expand their complementary services, such as adding more different types of
foods and beverages, including alcohol.
In terms of growth, the strategy
has been to grow via acquisitions. Many
are also investing in alternative content, hoping to fill the seats. Content remains king in this space and the
content that lures moviegoers and brings in 90%+ of admission revenues is
blockbuster films. Based on the 2014 and
2015 film release schedule provided by Box Office Mojo (www.boxofficemojo.com), we should see
many box office hits during the next 24 months.
Consolidation within the industry
The maturity of the industry has
led to more M&A in the space, as larger companies continue to acquire
smaller ones in order to accelerate growth, make their operations more
efficient, and hopefully to have a bigger say in pricing when negotiating with
studios and distributors.
We look for more acquisitions by
larger players, but not as much as we have seen in the last 3 - 5 years. Given how the equity market is valuing the
main movie theatres currently, it is likely that the acquisition targets will
demand higher EBITDA multiples; more than the 4x - 6x that we have seen in the
past.
Competition
Competition against this industry
remains intense. It includes in-home
entertainment such as watching movies on DVD, via cable and satellite companies’
video-on-demand (VOD), or by subscribing to OTT (over-the-top) or streaming content
providers such as Amazon (AMZN), Google (GOOG), Netflix (NFLX), and Hulu. Prices for these methods of content delivery
are lower than average price of movie tickets.
In addition, consumers have access to large libraries of content,
helping to satisfy their spontaneous urge to watch something. This is why movie theatres have been investing
in upgrades – to make it worthwhile for consumers to get out of their homes,
drive to the theatres, and pay higher prices for the movie and food.
Theatres do have the advantage of
showing newly released movies, especially the big hits, for a period of time
before they are released in other media.
Under agreements signed with studios and distributors there is a ‘theatrical
release window’ giving theatres exclusive rights to show movies on the
big-screen for an average of 3 – 4 months.
Such release window helps theatres differentiate themselves from other
media by showing the newest films first.
After the theatrical release window, movies become available on DVD,
then on VOD and OTT, and finally after a couple of years, on television.
Studios have done this to prevent
revenue cannibalization that would occur if movies were released in all types
of media at the same time. Such
theatre-advantage could be diminishing as studios have been testing to see the
impact of shortening theatrical release windows. As displayed in the graph below, release
windows have been getting smaller since 2000. This is driven mainly by consumers becoming
less patient and demanding to see newly released movies anytime, anywhere, and
via any device or platform.
Source: NATO (National Association of
Theatre Owners)
Overview of business model and the market
There are basically three types
of revenues that movie theatres generate: admission revenues from tickets they
sell to consumers to view the content; concession revenues from the variety of
foods and drinks they sell to their customers to make the movie viewing experience
more enjoyable; and advertising revenues.
In our opinion, the main driver for all of these revenues is the quality
and popularity of content, the movies.
Popular movies bring in more movie-goers, which then will lead to more
purchases of concessions. And the larger
audience will enhance potential ROI on advertisements, which means more ads
will be sold.
Theatres pay studios and
distributors for films on a sliding scale, meaning the higher a film’s national
box office receipts, the larger percentage of admission revenues theatres must pay
the studios and distributors. These
costs, usually referred to as film rents, are between 45% and 55% of admission
revenues. Given that 90%+ of admission
revenues come from the big hit movies, we believe suppliers have some advantage
when negotiating film rent agreements with exhibitors.
Concession revenues make up
approx. one-third of total revenues and they come at a cost of between 12% and
15% of revenues.
After accounting for facility
leases and other operating expenses, EBIT margins for the main players in this
space run in the low to mid-teens.
EBITDA margins range from 15%, for companies such as AMC, to 20%+ for
companies like CNK.
Most companies have increased
their capex as they develop new theatres, and upgrade and expand current and
newly acquired ones. Capex is running
between 3% and 10% of total revenues, depending on the size of the company and
its growth strategies.
While over 90% of screens in the
market have been upgraded to digital, we believe this figure is not applicable
to the remaining theatres that are acquisition targets. Foreseeing the higher costs associated with
upgrading newly acquired or current theatres to digital, acquirers have chosen
to finance those investments. For
example, AMC, RGC, and CNK did a joint venture called Digital Cinema
Implementation Partners (DCIP), where they secured over $600MM in financing to
convert over 14,000 of their screens.
The companies pay back with a fixed payment per screen and a royalty fee
of $0.50 per ticket sold. CKEC did a
digital upgrade agreement with Christie’s Digital Cinema business unit where
CKEC will pay an installation cost per screen plus a fixed annual per screen
maintenance fee.
Higher prices driving revenue growth
We estimate the industry
generated approx. $15.0bil in total revenues during 2013. Based on data from BoxOffice
(www.boxoffice.com), admission revenues, or box office receipts, grew at a
2.54% CAGR during the past 5 years. In
terms of attendance, the number of tickets sold grew at a 0.03% CAGR during the
same period. Clearly, the driver of
growth has not been increase in attendance but instead, higher ticket prices. As shown below, attendance began to decline
in 2002, many years before the Great Recession.
Source: www.BoxOffice.com
Although movie-going is
considered something discretionary and not a necessity, and is dependent on
disposable income, demand for such service has been price inelastic
historically; a PED of 0.19 based on the average price of $8.13 (1990 – 2013).
Theatres have taken advantage of
this as average ticket prices have increased 2.89% (CAGR) since 1990. The latest 5-year CAGR of prices has been
2.52%, compared to annual inflation of 1.64% (based on core CPI). This is positive for the industry, but continuing
price increases could impact attendance more negatively than in the past.
Demand becomes less inelastic as
prices increase. The chart below shows
the marginal impact of average price on PED in the movie theatre industry.
For example, if average price increased
to $10.00, PED would likely go to 0.23.
If average price increases to $15.00, it would result in a PED of
0.30. Again, overall, with higher
prices, attendance is likely to remain inelastic, but to a lesser extent, which
means it could continue to decline. We
note that average prices for RGC and AMC are already higher than $9.00, which
is above industry average. We look for
RGC’s and AMC’s average ticket prices to go above $10.00 in 2018 and 2016,
respectively.
Economists expect disposable
income to increase at an annual rate of 2.5% during the next five years, which is
positive for this industry, and could partially offset the negative impact of
higher prices on attendance. But it will
also allow exhibitors to take more chances and possibly increase their prices
at a higher rate, making overall attendance even more price sensitive.
Higher prices as driver of growth
in this space will increase risks for theatre operators. Risks have already increased as given the
very modest growth going forward, companies are forced to differentiate
themselves from substitutes by increasing capex and allocating a bigger portion
towards making their theatres fancier and creating the in-home entertainment
feel. This will push them to continue to
raise prices in order to generate respectable return.
In pursuit of other content
To partially offset higher risk,
movie theatres are trying to maximize their capacity utilization. In other words, they are trying to fill more
seats during times that most people do not go and see popular films - Mondays
through Thursdays. To do that, movie
theatres need cheaper content as theatres won't be as full as they are during
'normal' movie-going times. This means if
they pay high film rents for popular films, their ROI during those times will
be significantly lower. For this reason,
theatres are now pursuing the cheaper alternative content such as documentaries,
showing of live events, more independent and small-budget movies, short films,
etc., more aggressively. Whether this strategy will help diversify revenues and
enhance returns on theatre upgrades remains to be seen.
We also believe theatres’ investments
in making movie-going a fancy event rather than the casual leisure activity it
has been in the past could be questioned, especially when combined with
investing in alternative content. We do
not think many are willing to consistently pay a premium to sit in the
reclining seats and be served food while watching alternative content or
non-box-office hits. This means theatres
are likely to become more dependent on high-grossing films. The good news is that studios continue to
produce box office hits. The not-so-good
news is that the higher the box office receipts, the higher percentage theatres
will have to pay studios and distributors, due to their contracts being based
on a sliding scale formula.
Overall, the industry has had a good
start this year as combined domestic box office revenues for January and
February were up 10.3% Y/Y. This is partially due to more movies being
released in Jan. ’14 compared to Jan. ’13.
For movie theatres, the more is of course merrier. And many box office hits are expected to be
released during the next 24 months.
Larger players in the movie theatre space
We will focus on the four largest
companies in this space: Regal Entertainment Group (RGC), AMC Entertainment
Holdings (AMC), Cinemark Holdings (CNK), and Carmike Cinemas (CKEC). All of these companies face the same type of
competition that we touched on earlier, in addition to competing against each
other in some markets.
Overall, we see modest revenue
growth for these companies during the next five years with some margin
expansion. Metrics for these companies,
especially the ones paying dividends, are attractive.
In valuing the companies, we
applied the terminal multiple DCF model.
The exit EBITDA multiples we used are based on how the equity market
values each company’s peers on trailing 12-month (TTM) EBITDA. We also looked at the long-term growth rate that
each model implies, which we think could provide support for or discredit the
market’s valuation of the companies.
Tables below provide some operating and key valuation metrics for each company. We note that all projections are our own. We broke out CNK's operating metrics into U.S. and international, as unlike its peers, CNK's international segment generates a sizable chunk, nearly 30%, of its total revenues.
Regal Entertainment Group (RGC)
RGC is the largest movie theatre
company in the U.S. as it operates more theatres and screens than the other
three companies. It has a market cap of
$3.0bil.
The Company’s average ticket
price of $9.01 in 2013 was already above the industry’s. Given the top metropolitan areas that it
serves, we believe it can continue to raise prices at 2.5% - 3.5% per year,
slightly above the inflation rate.
However, once the average price goes above $11.00 we believe the higher
price can no longer offset more significant decline in attendance. We estimate RGC ending FY ’18 with average
ticket price of $10.19.
We expect 5-year CAGR of 5.9% and
4.3% for RGC’s EBIT and EBITDA. Combined
with 4% CAGR in total revenues, this translates to 260bps and 150bps EBIT and
EBITDA margin expansion during the same period.
Other assumptions and estimates
such as number of theatres operated, number of screens, attendance, concession
revenue per attendee, etc. are provided on table shown previously.
RGC has been aggressive in
upgrading its theatres for the past four years.
For example, in 2010 it initiated its RPX (Regal Premium Experience)
project which is basically an auditorium with luxury seating, wall-to-wall
screens, and an enhanced sound system.
The Company can utilize such multi-purpose indoor venues for other
events. This is another example of
companies in this space trying to fill the seats as often during the week as
possible.
RGC, along with AMC and CNK, has
also been installing IMAX (IMAX) digital projection system, which makes the
images much clearer, especially for larger or wall-to-wall screens. A portion of revenues generated in
IMAX-installed theatres goes back to IMAX.
However, we note that agreements with IMAX are geographically
exclusive. For example, if RGC has
installed IMAX in a certain area, others such as AMC with theatres in the same
area cannot install IMAX.
Of course, premium experiences
brought about by RPX, IMAX, and enhanced dining (improvements in foods and
beverages) require movie-goers to pay higher prices.
Regarding improvements in dining,
there is a risk that this will not pay off in the long-run given that most of RGC's
theatres are in top DMAs which are metropolitan areas. In these more densely populated areas, there
are more and higher quality options for premium movie-goers to choose from
before or after seeing a movie. But again,
concession revenues are dependent on attendance at movie theatres, and RGC's
attendance per screen has been declining.
While higher prices may help top-line growth, we view their negative
impact on attendance (in addition to other options available to viewers) as a
long-term risk.
In terms of advertising revenues,
RGC, AMC, and CNK founded a company called NCM (NCMI), which brings in ads to
be shown on screens prior to the main show.
NCMI refers to this as FirstLook.
NCMI is an $867.8MM company trading at 7.3x TTM EBITDA with an EBITDA
margin of around 48%. In addition to
ads, NCMI produced and distributed pre-recorded and live events. This segment, Fathom Events, was spun-off in
Dec. '13. After the spin-off, RGC owns
approx. 20% of NCMI and 32% of Fathom Events (or AC JV, LLC).
RGC, AMC, and CNK are hoping that
Fathom will help bring in alternative content and non-film entertainment for
their theatres.
More on the content front, RGC
also co-owns Open Road (with AMC) which may help bring in smaller budget films,
again, to fill the seats. We actually
think Open Road and Fathom should merge to create a stronger and more diverse
alternative content provider.
Steps have also been taken to
reduce some costs associated with getting the film from studios or
distributors. RGC, along with AMC and
CNK, is part of the Digital Cinema Distribution Coalition (DCDC), a JV that
helps deliver digital content to theatres via satellite. Companies such as RGC believe this may reduce
film transportation costs and provide more flexibility in delivering other
content.
Regarding how we think RGC will
perform going forward, below are some historical numbers and our projections
for the next five years.
Based on our 5-year DCF model
(more detail provided below) and RGC's 20% stake in NCMI, we value RGC at
$26.09/sh.
We note that given the Company's
negative equity, we used its current market cap as equity in calculating
WACC. RGC’s negative equity is due to it
paying large special dividends after its IPO in 2002. The Company paid a $5.00/sh dividend in Jul
’03 and a $5.05/sh dividend in Jun ’04.
For the terminal multiple, we
used the average of its peers’ TTM EBITDA multiple. The terminal multiple DCF model implies a
long-term growth rate of 0.77%, which we believe is low even for such a mature
industry. We think a range of 1.5% -
2.0% is more appropriate. In fact,
economists have projected a long-term U.S. economic growth trend of around
2%. The low implied growth rate provides
support for our belief that RGC is undervalued.
AMC Entertainment Holdings (AMC)
AMC is the second largest company
within this group, in terms of the number of theatres and screens it operates
in the U.S. It is valued currently at
$2.3bil.
The Company did an IPO in Dec '13
only about 15 months after being acquired by the Chinese conglomerate, Dalian
Wanda Group for $2.7bil. Wanda still
owns nearly 80% of AMC. The IPO appears
to have been a successful one as AMC's stock price has increased 31% from the
IPO price of $18.00/sh.
AMC’s average ticket price of
$9.27 in 2013 was already the highest in the industry. Similar to RGC, given the top metropolitan
areas that AMC serves, we believe it can continue to raise prices at 2.5% -
3.5% per year, slightly above the inflation rate. However, once the average price goes above
$11.00 we believe the higher price can no longer offset more significant
decline in attendance. We estimate AMC
ending FY ’18 with average ticket price of $10.58.
We expect 5-year CAGR of 13.5%
and 6.5% for AMC’s EBIT and EBITDA. The
higher EBIT growth rate is due mainly to the significantly lower stock-based
compensation that we have estimated for the next five years. Combined with 4.1% CAGR in total revenues, growth
in EBIT and EBITDA translates to 290bps and 150bps margin expansion,
respectively.
Other assumptions and estimates
such as number of theatres operated, number of screens, attendance, concession
revenue per attendee, etc. were provided in a previous table.
Compared with RGC, AMC is
upgrading its theatres and acquiring other ones more aggressively. It is using RealD 3D systems, in addition to
IMAX's digital projection systems. AMC
also introduced its own version of RGC's RPX, ETX, in March 2010. It appeared that the implementation of ETX
became an urgent matter as the famous comedian, Aziz Ansari, was angry about
paying extra to see a movie in AMC's IMAX theatre which, according to Ansari,
had a much smaller screen than he expected.
Unlike RGC, AMC's attendance per
screen increased in 2013 compared with 2012.
We think it was due to the Company's more aggressive marketing,
especially prior to its IPO. Given the
Company's higher average ticket prices than its peers, we believe attendance
per screen will begin to decline this year but will likely stabilize through
2016, after which it will again decline due to higher prices which we estimated
to be an average of $10.44. But this
does not mean that revenues will also decline given the higher prices.
AMC will also enhance its food
and beverage offerings (concessions).
But we think it will need to be more aggressive than its peers given its
theatre locations. AMC's theatres are
mostly in very densely populated metropolitan areas, similar to RGC. There are more and higher quality options
(substitutes) for premium movie-goers to choose from in these areas, before or
after seeing a movie.
As mentioned before, AMC also has
ownership in NCMI and Fathom, approx. 15% and 32%, respectively; and it co-owns
Open Road with RGC. It is also
participating in the DCDC strategy of having content delivered to theatres via
satellite.
Overall, AMC's strategy is
similar to RGC's: upgrade theatres, try to enhance the moviegoing experience
with reclining seats and better foods and beverages, and hope that movie-goers will
continue to pay higher prices.
Below are our AMC projections for the next 5 years.
Based on our 5-year DCF model
(more detail provided below) and AMC's 15% stake in NCMI, we value AMC at
$26.60/sh.
We could not find nor calculate
AMC’s beta, as the Company’s stock began trading in the secondary market only
recently. For this reason, and given the
Company’s similarities to RGC and CNK, we assumed the average of those two
companies’ betas for AMC. For the
terminal multiple, we used the average of its peers’ TTM EBITDA multiple. Based on the implied long-term growth rate of
3.55%, it appears that the applied multiple of 8.7, is a bit high. We think a range of 1.5% - 2.0% is more
appropriate for long-term growth. In
fact, economists have projected a long-term U.S. economic growth trend of
around 2%. In addition, our valuation
of AMC represents only a 13.1% upside.
For these reasons, we view the Company as being fairly valued rather
than under-valued.
Cinemark Holdings (CNK)
CNK is currently valued at
$3.3bil. Approx. 30% of CNK's revenues
come from its operations in the faster growing Latin America market.
While the Company's strategy is
similar to RGC's and AMC's, it appears management is a bit more conservative,
not only in terms of upgrades, but also cost control, which by the numbers make
it a more efficiently run company.
EBIT and EBITDA margins of CNK's
U.S. business have been higher than its peers' historically, and we think this
will continue going forward. The Company
has accomplished this even though its average prices are significantly below
its peers'. The Company’s average U.S.
ticket price of $6.95 in 2013 was below the industry’s. Given the overall increasing price trend, CNK
is positioned to up its prices more and accelerate growth. However, not as much as RGC and AMC because
the Company does not serve as many densely populated and high-traffic areas as
those companies do. For U.S., we have
assumed price increase comparable to the expected rate of inflation, or around
2%.
For Latin America, we have
assumed annual price increase of less than 1% given that it is more price
sensitive. At the same time, we believe
attendance in those markets will be more stable than in the U.S. And given the higher growth potential of that
region, we think advertisers have been eager to tap into those markets, which
is why we estimate an 8.14% 5-year CAGR for ad revenues generated in Latin
America.
We note that more risk is also
associated with the Latin America market, in terms of more volatility in
overall economic growth, disposable income, and the not so predictable impact
of currency exchange rates.
Other assumptions and estimates
such as total number of theatres operated, number of screens, attendance,
concession revenue per attendee, etc. were provided on a previous table.
As mentioned earlier, CNK is also
upgrading its theatres, but not as aggressively as RGC and AMC. It began opening what it refers to as XD
auditoriums in 2010. It is following
that up with further enhancements with its NextGen concept. Similar to RGC and
AMC, XDs and NextGen include wall-to-wall screens, better sound systems, luxury
seating, and more variety of foods and beverages. CNK has also utilized IMAX's technology,
along with 3D screens from RealD.
However, again, the premium that it charges is lower than the other
companies.
The Company has a 19% share in
NCMI and 32% in Fathom. It is also
participating in the DCDC strategy of having content delivered to theatres via
satellite.
Overall, although CNK will face
the same obstacles as other players, we believe the Company operates its
business more efficiently than its competitors.
The faster growing Latin American markets may provide more upside for
CNK even with the additional risks that we discussed.
Regarding how we think CNK will
perform going forward, below are some historical numbers and our projections
for the next five years.
Based on our 5-year DCF model
(more detail provided below) and CNK's 19% stake in NCMI, we value CNK at
$36.26/sh.
For the terminal multiple, we
used the average of its peers' TTM EBITDA multiple along with an EBITDA
multiple of 7.0 for its international operations. We weighted each multiple based on percentage
of total EBITDA that each segment represents.
The implied growth rate of 1.25% indicates that the terminal multiple is
slightly low, even for such a mature industry.
We think a range of 2.0% - 2.5% is more appropriate. In fact, economists have projected long-term U.S.
and Latin America economic growth trends of around 2% and 3%,
respectively. The low implied growth
rate provides support for our belief that CNK is undervalued.
Carmike Cinemas (CKEC)
CKEC is a bit different in terms
of size and the areas that it serves. It
is a $759.5MM company with theatres mostly in small to mid-sized suburban
markets. In addition, the Company is not
currently paying dividends.
CKEC will be pursuing
acquisitions aggressively during the next couple of years. Management intends to have approx. 300
theatres and 3,000 screens by mid-2016, up from 252 and 2,660 theatres and
screens, respectively.
The Company’s average ticket
price of $7.02 in 2013 was below the industry’s. We expect CKEC to up its prices at nearly twice
the rate of inflation, or 3.5% per year, for the next five years, resulting in
average price of $8.34 in FY ’18. However,
CKEC will not be able to match the much higher average prices of RGC or AMC, as
it serves markets in suburban areas.
We expect 5-year CAGR of 12.6%
and 7.2% for CKEC’s EBIT and EBITDA. Combined
with 6.2% CAGR in total revenues (driven by acquisitions and price hikes), this
translates to 310bps and 90bps EBIT and EBITDA margin expansion during the same
period.
Other assumptions and estimates
such as number of theatres operated, number of screens, attendance, concession
revenue per attendee, etc. were provided on a previous table.
Unlike its peers such as CNK,
CKEC has not yet upgraded 100% of its theatres to digital. According to the Company, 95% of its theatres
and 96% of its screens are digital. For
this reason, some of CKEC’s current and newly acquired screens will need
digital upgrades, a service provided via its agreement with Christie’s Digital
Cinema. As mentioned earlier in the
report CKEC’s agreement with Christie requires an upfront installation cost plus
a fixed annual maintenance fee per screen.
Given that this increases CKEC’s fixed costs, the upside in terms of
margin expansion becomes attractive as revenues grow. However, it also carries a risk to the
downside if revenue growth decelerates.
RGC, AMC, and CNK’s DCIP arrangement creates more of a variable cost for
those companies given the royalty they will pay DCIP per ticket sold. Although the upside may not be maximized in
terms of margin expansion, this model does provide some downside protection for
those companies if attendance per screen declines more rapidly.
CKEC’s own version of RPX (RGC’s),
ETX (AMC’s), and XD (CNK’s) is referred to as BigD. The Company has also installed IMAX’s digital
systems in some of its markets.
Regarding ad revenues, CKEC is
not working with NCMI, but it has an agreement with a similar company,
Screenvision, which is owned by a holding company, SV Holdco. CKEC has a 19% stake in SV Holdco.
CKEC does have one advantage –
people that live in the suburban areas, in which most of its theatres are
located, are less likely to have as many other leisure activity options as the
people that live in urban areas do. For
this reason, we expect attendance per screen to remain constant going forward
as opposed to declining which may be the case with the other companies.
While we touched on some risks
associated with investing in expanding foods and beverages offerings for other
companies given where most of their theatres are located, we do not believe the
same applies to CKEC. There will not be too
many substitutes for moviegoers when it comes to dining or foods and beverages
in suburban areas. In fact, we believe
the ‘one-stop shop’ strategy (having restaurants inside auditoriums) could be
effective for CKEC’s theatres. Although
content remains the main driver behind attendance, in areas with less options
available it could be the other way around, where initially some come in for
the food and may follow that with purchasing tickets to watch a movie.
Below are our projections for
CKEC for the next 5 years.
Based on our 5-year DCF model
(more detail provided below) we value CKEC at $30.08/sh.
For the terminal multiple, we
used the average of its peers’ TTM EBITDA multiple. The implied long-term growth rate of 5.73%
indicates that the applied terminal multiple is too high for this company. We think a range of 1.5% - 2.5% long-term
growth is more appropriate for CKEC. We
think it could be as high as 2.5% (compared with the 2.0% that we suggested for
RGC and AMC) because it is more likely that consumers in suburban areas will
use a higher percentage of their disposable income consistently to watch movies
than those that live in more densely populated areas. As mentioned before, economists have
projected a long-term U.S. economic growth trend of around 2%.
In addition, CKEC’s WACC is significantly
above its peers’. This is due to the
much higher interest the Company pays on its capital leases and financing
obligations (which we include as part of CKEC’s total debt) and on its senior
notes, making its cost of debt much higher than the other companies’. The much higher beta for CKEC also drives
WACC higher. With all of this said, in
our opinion, when compared to its peers, CKEC is a riskier investment in
addition to being just a bit over-valued currently.
