The 2015 summer movie season is in full swing. Already this year, millions of Americans have crammed into movie theaters, equipped with buttery popcorn and sugary beverages, to witness everything from their favorite super-powered heroes saving the world yet again to terrifying genetically engineered dinosaurs with a penchant for human flesh. Still to come in 2015 are yet more superhero movies, action-packed and stunt-ridden spy flicks, and (my personal favorite) nerdy space-themed sci-fi dramas.
In this day and age of instant, mobile, and at-home entertainment, Hollywood and the silver screen still rake in ample amounts of revenue. There is something exciting and almost sentimental about going to a movie, and the movie theater business is still very much alive and well-entrenched in our culture. As homage to the summer movie season, let's take a critical look at the three largest movie theater chains in America and their investment worthiness.
A side-by-side comparison
The U.S. movie theater industry is dominated by three players: Cinemark Holdings (CNK -0.67%), Regal Entertainment Group (NYSE: RGC), and AMC Entertainment Holdings (AMC -3.25%). Here is a basic overview of each as of this writing:
|
CNK |
RGC |
AMC | |
|---|---|---|---|
|
Market Cap (billions) |
$4.83 |
$3.29 |
$2.88 |
|
Dividend (annual per share) |
$1.00 (2.4% yield) |
$0.88 (4.2% yield) |
$0.80 (2.8% yield) |
|
P/E (trailing 12 months) |
24.23 |
25.18 |
38.97 |
|
Forward P/E (next fiscal year) |
17.51 |
16.98 |
20.54 |
You will notice that all three companies are midcaps, and that all three pay dividends. The trailing and forward price-to-earnings ratios for the smallest of the three, AMC Entertainment Holdings, are quite high, signifying higher growth expectations. Despite this, AMC still pays a higher yield than the largest movie theater company, Cinemark Holdings, although both fall short of Regal Entertainment Group's attractive 4.2% payout yield. If we were to stop our analysis here, I would rank Regal Entertainment as the clear winner on the basis of its dividend yield and because the movie industry is a mature business with limited growth potential.
Business growth and dividend growth
But let's look at these silver-screen companies from one more angle. What is the potential for business growth that could translate into stock price appreciation, and what is the potential for dividend growth (since we are considering a very old business model)?
|
CNK |
RGC |
AMC | |
|---|---|---|---|
|
Total debt (billions) |
$2.04 |
$2.36 |
$1.90 |
|
1.79 |
0.72 |
0.70 |
|
|
5-year dividend growth rate |
0.82% |
4.1% |
N/A |
|
Total cash (millions) |
$532.84 |
$172.40 |
$144.80 |
|
Operating cash flow (millions, trailing 12 months) |
$417.87 |
$323.00 |
$320.44 |
Looking at these numbers shows Cinemark in the best financial situation, with the lowest debt-to-cash and debt-to-cash flow ratios. AMC, which had its IPO in December 2013, and RGC both pay out more in dividends than their earnings per share, which over the longer term could lead to dividend cuts. For stability of business model, I think Cinemark is the winner thanks to its lower debt burden, larger cash position, and higher cash flow. These numbers bode well for income-seeking investors who want stability of cash payments over time.
Here are the sales and earnings growth for the companies over the last five year period:
|
CNK |
RGC |
AMC | |
|---|---|---|---|
|
Sales five-year growth rate |
5.86 |
0.66 |
2.70 |
|
Earnings per share five-year growth rate |
13.71 |
1.74 |
-11.30 |
These numbers also point to Cinemark being the most financially sound from a growth perspective. While Regal and AMC have had stagnant or falling sales and earnings the last five years, Cinemark has been posting modest but respectable growth figures, especially when it comes to growing earnings. Cinemark seems to be the winner here as far as success in generating business growth.
Reviewing the movie theater industry
The movie industry is indeed changing as many opt to stay home and stream video digitally. Theaters are fighting back, though, with an increasing number of 3D films, luxury venues, and food offerings over and above the traditional theater concessions like popcorn and soda. As a result, ticket sales and revenue are expected this year to top, respectively, $1.3 billion (up from $1.27 billion in 2014) and $10.79 billion (up from $10.37 billion in 2014). If you are a summer moviegoer and investor, how might you capitalize on the business?
Summing up the data just reviewed, I would rank the country's largest movie theater chains by current investment quality as follows: (1) Cinemark Holdings, (2) AMC Entertainment Holdings, and (3) Regal Entertainment Group. In an industry that has limited growth upside, I like Cinemark's stability and healthy balance sheet when compared with the competition. With its cash on hand and healthy financial ratios, it also appears to be in a better position to expand operations without taking on additional debt.
