Carmike Cinemas: Best of Breed, But Is It Cheap Enough?


While rising content costs have kept some media companies from raising their bottom lines, movie theaters seem to be navigating the waters well. One regional theater chain knee-deep in its restructuring effort, Carmike Cinemas , has been particularly successful in recent times. The company recently released a stellar earnings report, contributing even more to its more than 30% run since October of last year. Carmike was long ignored as a stock because it is regional player that cannot benefit from the same efficiencies of scale as other, larger theater chains. By now, the secret is out that this company is likely the top pick in the industry, but is it too late for you to invest? Let's take a closer look.

Business overview and why I like it
Carmike may not be a very exciting company. In fact, it's not. It's not as profitable as its national competitors, Regal Entertainment Group and Cinemark, and it has a troubled history -- emerging from bankruptcy in 2001. But company management has made some fantastic decisions over the years that has it on the road to real growth. For one, the company took a stake in theater advertising firm Screenvision, and it's been accretive to Carmike's bottom line ever since. Instead of the typical revenue share agreement between theaters and advertisers, Screenvision paid Carmike $30 million in cash (which was a lot for the company at the time), and offered a 20% stake. The latter is what proved to be a stellar long-term growth driver, in addition to other organic avenues.

As mentioned by a Wedbush Securities analyst, Carmike is growing its screen count. In two acquisitions during the fourth quarter, it picked up an additional 267 screens. Though films have not steadily produced big returns for their producers, box-office ticket sales are flying high, driven by big 3-D ticket sales.

Back in 2011, value investor Chris Mittleman identified his price target at $17 per share -- just short of 6% upside to today's price. The company has certainly performed well over the last couple of years, but is the margin of safety gone from this theater outperformer?

Recent earnings
Organic screen growth and the Screenvision stake will keep Carmike growing on the income statement, but is that already baked into the stock price?

The most recent earnings release may have some hints.

Fourth-quarter revenue rose up 23% to $146.6 million. Theater level cash flows grew by 32% to $35.6 million. Full-year box-office gains bested the industry by an impressive 220 basis points and helped bring adjusted EBITDA up 60% from 2011. The company has passed the 2,500-screen mark, and seems on track to hit 3,000 screens. Both admissions receipts and concessions rose year over year, confirming solid organic growth on both bottom and top levels.

But let's get down to it. In his 2011 interview with The Wall Street Journal, Mittleman thought a reasonable, if conservative, EBITDA multiple for the industry would be seven times. Currently, the company's EV/EBITDA sits at 5.36 times based on full-year 2012 EBITDA at $97.9 million. For comparison, Regal trades at eight times EV/EBITDA and Cinemark at just under eight times.

There is a difference between the companies, though. Cinemark and Regal are global companies with theaters across borders. Carmike is very, very small in comparison. Yet I find that Carmike may have a favorable position despite its scale disadvantage. Having a hold on rural areas in the U.S., Carmike doesn't need to fight for its audience. In many towns, it is the only theater within 20 miles. That may be the very definition of a high-moat business.

Carmike did not produce any free cash flow this year, as most of its CFFO was used up in theater acquisitions, building new theaters, and refinancing. However, once the company hits its mark of 3,000 screens, we may see a slowdown in capex spending, which should allow the company to return to its typical high free cash flow. In 2011, the company was able to generate $50 million in cash flow with 2,230 screens.

I believe Carmike will continue its upward trend, though I am not too eager to buy shares at today's price. Investors may very well see decent capital appreciation throughout the year, but this is shifting to a growth story. As its management said best, Carmike Cinemas' period of "fix-it" is over. That said, growth buyers may want to take a second look as the company appears to be on the lower end of valuations when compared to peers.

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