Regal Cinemas: A Leading Outlet for America's Greatest Product

The just-ended quarter may not have impressed the Street, but the long-term outlook remains favorable for one the nation's leading theater chains.

Feb 22, 2014 at 9:00AM

The major film studios have found success recently through rising box office revenue, but one big miss is all it takes to sink a studio for months. The box office itself is a steadier business. Regal Cinemas (NYSE:RGC), one of the industry giants, is finding success in nearly everything it does -- from concessions to expansions. Considering the organic growth, along with value-added acquisitions and investments, Regal's growth prospects are quite appealing despite it being in a very mature market. For two full years in a row, the company has   hit record revenue and EBITDA. Here's what investors need to know.

Smash hits
Aided by 3-D and IMAX films such as Gravity and latest Hunger Games installment, as well as standard-format hits like The Wolf of Wall Street, Regal Cinemas saw strength across many segments of its business. However, some of the financial figures -- adjusted EBITDA and net income -- took a hit in the recently ended quarter due to an industrywide decline in attendance and higher costs. Investors should note that box office results can vary greatly from quarter to quarter, but longer-term trends have shown consistent attendance. Movies are still America's greatest product.

In the company's fiscal fourth quarter, revenue rose to $740 million from $721.4 million in the year-ago quarter. Adjusted EBITDA came in at $126 million, which was nearly $25 million less than 2012's fourth quarter.

Regal is seeing healthy ticket price growth and concession sales growth, with the latter posting a 3.5%per-person bump in the just-ended quarter. Concessions in general are the shining star of the theater business due to the ridiculous margins -- Regal enjoyed an 86.7% concession margin. This marks the 10th quarter in a row that the company has delivered 2.5% or higher growth in concession sales.

A sequel?
Regal may not have had the best headline numbers for its latest quarter, but investors can expect the long-term outlook to play better. For one thing, the company is on top of the concessions trends, adding services such as full food and drink menus, sometimes delivered right to your seat. While this heightened level of service may impact the tremendous margins typically associated with popcorn and soda (think 500% or more), it nonetheless increases sales for the segment and has the potential to drive more people into the theaters.

With tremendous funding and a national blueprint for expansion, Regal is able to grow organically and via acquisition. Last year, the company tacked on 500 screens from Hollywood theaters.

This year sports a huge slate of movies and has already been buoyed with hits such as Disney's Frozen. The spring and summer release schedule is chock-full of superhero films, of which people apparently are not yet fatigued. The 3-D and IMAX films will continue to generate substantial, growing box office revenue. Couple that with concessions and Regal's ever-expanding screen count, and you have a company set to achieve steady, reliable growth. At 14.7 times forward earnings estimates and a recently increased 4.6% dividend, Regal Cinemas offers investors the potential for capital appreciation along with steady income.

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