|
Published: August 19, 2009
Regal
Entertainment Group (NYSE: RGC) is the nation's largest
movie exhibitor, with a coast-to-coast network of 550 theatres
and over 6,800 screens.
There has been a great deal of consolidation in the movie
business over the past decade, and Regal has been a hungry fish
in a shallow pond. Today, the company operates in 44 of the
country's top 50 markets and has an industry-leading 16% market
share.
But management is always on the lookout for potential
acquisition targets. And once new theatres join the family, they
are usually quick to trim expenses and improve profitability --
if for no other reason, Regal's size means better film licensing
deals and favorable contracts with concessions suppliers.
It's also worth noting that Regal's theatres are among the best
in the industry. Nearly three-fourths offer plush stadium-style
seating, and all are being outfitted with advanced Sony 4K
digital projection systems that produce stunning resolution and
picture quality (8.8 million pixels). This will help keep the
company a step ahead of its outdated competitors.
This can be a tough business at times. Movie studios often have
the upper hand at the bargaining table, and occasional dry
spells at the box office are to be expected. But there are
plenty of advantages as well.
For example, multiplex owners have a largely fixed cost
structure, so business tends to be scalable. Expenses such as
rent and labor generally remain the same whether a theatre is
sparsely crowded with a handful of people or slammed with
several hundred. That operating leverage means incremental
income from extra visitors flows right to the bottom line.
We've seen this in
action lately. Approximately 66.3 million people attended a
Regal showing last quarter, nearly 7 million more than the same
period last year. Those customers also shelled out $8.17 per
ticket, up from $7.63 the year before.
That combination propelled revenues up +17% for the quarter,
which easily outpaced the +13% increase in expenses. As a
result, operating margins expanded by over 260 basis points and
free cash flows surged +170% to $0.74 per share.
Going forward, my staff and I feel
that attendance will continue
trending higher as consumers realize
that movies are relatively
inexpensive next to concerts,
sporting events and other
entertainment venues.
Despite a sagging economy, Regal
attracted nearly a quarter of a
billion visitors last year. And
those customers aren't sitting
through Harry Potter and the
Half-Blood Prince or Ice Age: Dawn
of the Dinosaurs empty-handed --
sales of popcorn, beverages and
other concessions are ticking higher
as well.
But the climactic finish is still to
come.
Regal has invested aggressively to
transition from yesterday's 35-mm
film to superior IMAX and digital
3-D formats. This electronic
distribution provides greater
programming flexibility and will
enable Regal to more profitably
utilize its floor space. More
importantly, movie buffs are happy
to pay premium rates for a more
immersive experience.
All of this should keep cash popping
out of the bin, and management likes
to serve it right back to
shareholders -- generous quarterly
dividends of $0.18 per share add up
to a satisfying yield of 6.2%.
Action to
Take --> Regal is
strengthening its balance sheet,
upgrading its facilities, and
investing in new ventures like
in-theatre advertising. And the
company just posted record-breaking
sales and profits. Yet, the shares
are still trading at an attractive
Enterprise Value/EBITDA below 7.
-- Nathan Slaughter
Editor
StreetAuthority Market Advisor |
