Film studios, like other entertainment businesses, are having trouble adapting to new trends and consumer preferences. The theaters, on the other hand, seem to be doing better. Despite rising content costs and video-on-demand competition, theaters have been able to grow revenues steadily (if slowly) over the long term and to create more profitable revenue streams via premium experiences and expanded, higher-margin concessions. The country's largest theater chain, Regal Entertainment (NYSE:RGC), is profiting from these elements and more. The company and its investors are set to benefit over the long term from the studios' reliance on megabudget tentpole films, along with improving company-specific operations. Here's why you should take a look at Regal.
Fiscal third-quarter revenues grew substantially over the prior year for Regal Entertainment with top-line sales of $813.1 million versus $692.9 million the year before. Adjusted earnings more than doubled -- $0.38 per share as compared to just $0.17 in 2012's third quarter. Both revenue and adjusted EBITDA represented record results for the company, as noted by management in the earnings release.
In the near future, the massive theater chain has Lions Gate's second installment in the Hunger Games series coming out this holiday season -- an event that will without doubt deliver one of the year's biggest, if not the biggest, box office weekends. Looking to 2014 and beyond, the number of franchise films from the big studios will only increase as the rule of the game appears to be "safety in numbers." This means more Marvel comics films from Disney, two more Spider-Man movies, three new Star Wars films (again from Disney), two more Hunger Games films, etc., etc.
While the mass-appeal films continue to roll out -- many in the higher-margin 3-D format --Regal and other theater chains are also pushing new to heights on concession revenues. While an average of 55% of ticket revenue goes back to the distributors, concession sales hold incredibly high margins, sometimes pushing 90%.
With the largest presence in the United States and still growing, Regal is the gorilla in the space. In addition to expanding the number of core chain locations, as well as recently expanded chains such as Cinebarre (a dinner/movie format), management is focused on concessions. In a quickly increasing number of locations, Regal Entertainment is offering made-to-order food at the concession stand. Similar to the pricey popcorn and soft drinks, these items are marked high above their cost and deliver fantastic margins to the company.
Both ticket sales and concessions sales are cash-generating revenue streams. So far this year, the company has generated $192.2 million in free cash flow. With the holiday quarter being the biggest, investors may see upward of $400 million in full-year 2013 free cash flow. At that estimate, the company only trades at 7.5 times current cash flow, and lower looking further out.
One concern investors must consider is debt. With Regal's consistent expansion has come a relatively high debt load. Though management is steering some cash toward deleveraging, the company still has $2.3 billion in debt with only a $2.9 billion market cap. Liquidity won't be an issue, as the company's operations clearly generate enough cash to cover short-term liabilities, but it is a figure to watch as management should not let the figure balloon much higher.
All in all, Regal Entertainment is an appealing, cash-generating stock available at a seemingly cheap price.
Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.