Cinemark: On Track To Profitability And A Bargain Next To AMC

Warner Bros. To Put 2021 Theatrical Movie Releases On HBO Max Streaming Service

Scott Olson

Cinemark Holdings Inc (NYSE:CNK) is the third largest movie theater chain operator in the United States along with a leading market share in several Latin American countries. Compared to the historic industry disruptions during the pandemic, 2022 has been defined by a strong recovery as easing Covid restrictions and a couple of blockbuster releases have worked to bring the masses back to the movies. Indeed, Cinemark recently released its latest quarterly result highlighted by climbing attendance and improving financials supporting an outlook that has evolved largely better than expected.

We are bullish on CNK with several tailwinds driving continued operating momentum while shares appear undervalued. CNK stands out through several metrics next to its movie theater peer and competitor AMC Entertainment Holdings Inc (AMC). In this case, while both companies are benefiting from an industry turnaround, CNK may be a better stock with more upside going forward.

CNK Earnings Recap

CNK reported its Q2 earnings on August 5th with a GAAP EPS loss of -$0.61, or $73.2 million in negative net income. Notably, this result included a large $92 million impairment related to the company’s investment and 26% interest in National CineMedia Inc (NCMI). This is a smaller movie theater chain, which has seen its share price trade with extreme volatility, falling by more than 40% this year amid the broader market selloff. By this measure, excluding the accounting charge, the underlying operation was profitable, evident in the positive adjusted EBITDA of $138.3 million in the quarter, compared to a loss of $11.8 million in the period last year.

The story here was strong growth. Revenue of $744 million climbed by 153% from $294.6 million in the period last year, beating the consensus estimate by $10 million. Attendance of 52 million customers worldwide jumped from 19.1 million in Q2 2021, although still down about 35% from 80.2 million moviegoers in Q2 2019. Management notes that attendance trends continue to improve into Q3 along with a stronger performance by region and operating country.

We mentioned the higher average pricing. On a worldwide consolidated basis, the average ticket pricing of $7.34 is up from $6.50 in Q2 2019. Just considering the U.S. which represents about 80% of the business, the average ticket price of $9.11 is up from $8.12 three years ago. Similarly, concession revenue per patron is also up. Simply put, Cinemark has been able to drive average pricing higher to balance inflationary cost pressures. The adjusted EBITDA margin of 18.6% climbed from 5.5% in Q1 and is expected to trend back towards its 2019 pre-pandemic benchmark of 26% as conditions normalize.

CNK metrics

source: company IR

CNK versus AMC

Most traders will be aware that shares of AMC Entertainment Holdings Inc, the largest North American movie theater chain, have taken on a life of its own as a “meme stock“, subject to wide swings of speculative momentum. In early 2021, AMC joined GameStop Inc (GME), in an epic short squeeze rally where shares climbed from a low of $1.91 to as high as $72.62 in a little less than six months.

There’s been a recent resurgence of this phenomenon in the market with AMC climbing over 60% in the past month months although CNK has not captured the same market enthusiasm with just a modest 7% gain. That being said, we note that CNK has still outperformed AMC over the past year with a 19% return compared to a 27% decline in AMC, even considering the most recent big rally. The point here is to say we believe CNK will continue delivering stronger returns and outperform AMC.

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Data by YCharts

For context, with pre-pandemic 2019 data, CNK held a 13% market share in North America compared to AMC at 23%. On the other hand, CNK was at an advantage in major Latin American countries like Brazil and Chile as the market share leader. The attraction in these markets is its high growth potential based on more structural themes like a growing middle class supporting stronger trends in movie attendance beyond the pandemic disruptions.

CNK metrics

source: company IR

CNK’s adjusted EBITDA margin in Q2 at 18.6% was well above AMC which came at just 9.2%. Similarly, CNK has reached positive free cash flow while AMC is still in the red. One of the reasons behind this spread is Cinemark’s lower CAPEX spending in Q2 as a percentage of revenue, at 2.9% compared to AMC at 3.5%.

AMC vs CNK

source: company IR

Cinemark’s made significant investments in refurbishing and modernizing its theaters between 2015 and 2019 as part of its strategy to drive growth through innovations. The upside here is that with relatively lower Capex requirements, free cash flow was positive at $143 million in Q2 while AMC was still negative, in part because of higher current spending. In other words, Cinemark is now bearing the fruits of its strategy that was in place last decade.

The other point here is that Cinemark benefits from a stronger balance sheet compared to AMC. While both companies added significant debt during the pandemic, CNK ended the quarter with $1.8 billion in net long-term debt compared to AMC, much higher and closer to $4.4 billion.

CNK metrics

source: company IR

The contrast of Cinemark being a stronger company also extends to both movie theater chains’ consensus estimates. The biggest difference here is that Cinemark is on track to reach full-year profitability in 2023 while AMC is forecasted to remain stuck in a proverbial earnings purgatory through at least 2025. CNK is expected to average stronger growth between 2023 and 2024, averaging 12% compared to AMC at 10%.

CNK metrics

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The speculative frenzy around AMC has bid up shares to some extreme valuation multiples, opening up a large premium to CNK. In terms of each stock’s EV to forward revenue estimate, AMC is more than twice as expensive at 3.9x compared to CNK at 1.5x. Cinemark’s EV to forward EBITDA multiple at 9.8x is much more reasonable compared to AMC at 65x from the same metric.

Other than AMC’s name recognition and its cemented status as a “meme stock” extraordinaire, our argument here is that CNK is simply the better stock and stronger company.

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Data by YCharts

CNK Stock Price Forecast

The movie theater business has faced many challenges over the past decade even before the pandemic, with sluggish attendance growth against the rise of at-home streaming services and other forms of media consumption. Still, the attraction of movie theaters and Cinemark is a sense that the latest operating trends and box office momentum help to reaffirm that the industry is alive and well with an improving outlook.

With the current macro environment defined by high inflation and mixed economic indicators, we believe movie theaters stand to benefit as a relatively affordable form of entertainment, at least compared to a road trip type or overseas vacation. In other words, as families may cut back on some types of spending, a trip to the local movie theater can still be on a budget along with its unique social aspect of being a night out.

For the rest of the year, some big theatrical movie releases including The Walt Disney Company (DIS), sequels to “Black Panther” and “Avatar” have the potential of being record-breaking as a positive catalyst for Cinemark attendance and earnings estimates.

CNK metrics

source: company IR

Final Thoughts

We rate CNK as a buy with a price target of $22 representing a 15x EV to the 2022 consensus EBITDA. The price target can also be expressed as a 12.5x EV multiple on the annualized Q2 adjusted EBITDA run rate which should further improve through 2023. Over the next few months, CNK should benefit from improving macro indicators with some sign that inflation is cooling off supporting a positive scenario for consumer discretionary and leisure demand. Longer-term, the ability to consolidate market share and generate higher earnings can allow shares to reprice even higher.

Going back to our comparison with AMC, CNK appears to be a fundamentally stronger company and may be a better choice for investors to gain exposure to the trends in the movie theater industry. While a deeper look at AMC deserves its own article, shares being driven by speculative momentum only places it into a higher risk category.

On the downside, a deeper deterioration of the economic environment would likely add to broader financial market volatility and open the door for a leg lower in CNK. Movie box office trends along with attendance indicators over the next few quarters will be key monitoring points. We want to see some upside in the adjusted EBITDA margin as confirmation profitability is trending higher.

CNK chart

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