A leveraged provider of in-theater advertising is starting to buckle, and it's easy to wonder what the ramifications will be for AMC Entertainment Holdings (AMC +0.00%) and the rest of the country's multiplex operators. Shares of National CineMedia (NCMI 2.08%) have shed two-thirds of their value this year, and hopes for a turnaround are starting to run dry.
B. Riley analyst Eric Wold slashed his price target on National CineMedia from $4 to $1.50 three months ago, adjusting that price goal to $1 on Monday. He points out that the company behind the country's largest cinema advertising network is facing some serious near-term headwinds.
The bankruptcy filing earlier this month by Regal Entertainment's parent company, Cineworld Group (OTC:CNNW.F) -- which along with AMC were the ad platform's two biggest accounts -- weighs on National CineMedia's business. He also cites media reports that National CineMedia's creditors have hired a financial advisor to explore their options ahead of a meaningful debt balance maturing in June of next year. Let's look at the situation to see if AMC investors need to worry about the fate of a struggling National CineMedia.
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There's a fair amount of theater patrons who enjoy movie trailers ahead of the screenings they pay to see, but few will argue in favor of the long ad breaks that precede them. This is National CineMedia's turf, as it distributes video ads running as part of its America's Movie Network to AMC, Regal, Cinemark Holdings (CNK +1.06%), and other exhibitors. However, it is one more lever of monetization for multiplex operators, hungry to remain financially viable on this side of the pandemic.
National CineMedia itself was consistently profitable through 2019, but it's eyeing its third consecutive year of losses in 2022. Analysts see a return to profitability for National CineMedia by next year, and that's important since it surprisingly pays a small quarterly dividend despite its run of deficits and the near-term obstacles its recovery is facing.
The headwinds are stiff right now. For starters, recessionary fears can be brutal for the advertising industry, as marketers historically pare back their spending. We also can't sleep on the debt that comes due in nine months. With borrowing costs surging in recent months, National CineMedia is facing a spike in the interest it will have to dish out in the future.
An advertising platform is only as strong as its audience, and with ticket sales falling sharply over the past two months, it's going to make it that much harder for National CineMedia's business model to get advertisers to pay up for its thinning guest counts.
Will National CineMedia weather the storm? Right now, it doesn't have to follow Regal parent Cineworld into bankruptcy, and the audience drought should reverse later this year as highly anticipated Black Panther and Avatar sequels hit the silver screen.
The story will change if audiences and advertisers don't come back, but even a potential Chapter 11 bankruptcy reorganization filing for National CineMedia in that scenario won't necessarily result in AMC taking a hit. National CineMedia will keep pushing out ads to exhibitors, and it would emerge from the mess with a cleaner balance sheet. Only the company's shareholders and perhaps its creditors will feel the sting.
The big concern for AMC and Cinemark would be the conditions that would make National CineMedia creditors push for reorganization, as that would suggest a bigger shortfall for the multiplex industry in general.
For now, AMC is biding its time. It knows bigger movies are going to woo bigger crowds as we head into the holiday season. Unlike a third-party ad network, AMC and other financially viable movie theater stocks are making the most of the lighter audiences with an increase in high-margin food and beverage sales per customer. The levers are still there for AMC. National CineMedia is the only one potentially running out of options.
