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The Show Must Go On

Rick Aristotle Munarriz
April 25, 2007

From the ashes of a sector seemingly left for dead following its gluttonous ways in the 1990s, an IPO is born. Cinemark Holdings (NYSE: CNK  ) went public at $19 yesterday, at the high end of its projected range. Though the stock quickly dipped during yesterday morning's market debut, it rebounded a bit today, slightly topping its original price.

As the third-largest multiplex operator behind Regal (NYSE: RGC  ) and AMC, Cinemark probably shouldn't have expected a frothy reception. It's also irksome that slightly more than half of the IPO's 28 million shares were sold by insiders, even if the sellers are mostly private equity firms that live and die by the exit strategy.

And let's not forget the seemingly sorry state of the movie theater industry. Home theater systems, mail-delivered DVD rentals, and digital delivery are trends should all be eating away at the movie business's viability. In fact, until a 6% bounce last year, theater attendance was on a three-year skid.

So why is Cinemark even bothering to go public? And why is rival AMC ready to follow suit? Maybe there's a bright side to the dark movie houses. Maybe there are opportunities within the same industry that spawned heartbreak and bankruptcies several years ago.

Maybe. But you'll have to stick around to the last reel to find out for sure.

The teaser trailer on Cinemark
Cinemark's numbers aren't great. The company generated a profit of just $0.8 million on $1.2 billion in revenue last year. The net income may seem paltry for a company that now commands a $2 billion market cap -- and an even higher enterprise value, given its $1.9 billion in long-term debt -- but it could be worse. Cinemark actually posted a loss in each of the two preceeding years.

The company controls 4,488 movie screens, with an emphasis on large and midsized metropolitan markets. It claims to be the top or second-largest chain in 28 of the country's 30 largest markets. Cinemark is also a major player in Latin America.

Most investors would heed the "move along, nothing to see here" warning. But I'm not so sure that this will be a dud of an investment, especially with shares still hovering around the company's IPO price.

The National CineMedia sizzle
Cinemark and AMC's nearly simultaneous IPOs aren't the only thing the two companies have done together. They've also teamed up with Regal to form digital marketing specialist National CineMedia (Nasdaq: NCMI  ) .

Using digital systems, National CineMedia is able to deliver ads between screenings to its entire network of theaters. The venture is also able to serve up music concerts and sporting events to cinemas, giving the sleepy stadium-seating venues a premium-priced special-events kicker. Even during moribund weekday mornings and afternoons, National CineMedia sells the ability to broadcast in-theater meetings to large corporations.

Cinemark had a 25% stake in the venture. Now that National CineMedia has gone public, that slice has narrowed to 14%. However, Cinemark did receive a $389 million payment to offset the dilutive blow. It also stands to collect theater access fees, along with a cut of distributions of any excess cash National CineMedia may generate. These requirements might make National CineMedia a less attractive investment, but they do make Cinemark more appealing.

The future of celluloid
When you're heading out to the movies, you make sure you get there early enough to grab a good seat before the feature presentation begins. That's the kind of vibe upon which AMC and Cinemark are looking to cash in.

Box offices are buzzing so far in 2007, and they're about to explode in the coming weeks. Pirates of the Caribbean, Harry Potter, Shrek, and Marvel's (NYSE: MVL  ) Spider-Man all have highly anticipated sequels on the release slate. And just in case you're not familiar with any of those properties, Pirates of the Caribbean: Dead Man's Chest, Shrek 2, and Spider-Man were the top draws of 2006, 2004, and 2002 respectively.

So Cinemark is heading into friendly waters here. In addition, its IPO proceeds and National CineMedia money may go a long way toward paying down the company's chunky debt. You probably weren't impressed with last year's $0.8 million in earnings, either; trust me, there are deeper P/E values out there than Cinemark, trading at 2,500 times last year's profitability. However, operating income came in at a robust $127.4 million, and hacking away at Cinemark's debt will help improve a 2007 that should be