My thesis on going long Brazil
posted by Nomad-amus at
3:57 PM
Sunday, August 12, 2007
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6 Comments:
I want to get in early on this investment
Now THAT is a scenario with 0 downside and 100% upside.
Doug, would you like to bet on RGC? Its already up 5% from when I wrote that, only 45% to go...never came close to breaking the brick floor at $20.
Keep making fun of me...you will be wrong.
Come on Silver go grab yourself a drink. Fresh is only jabbing at yeah. Are you getting season tix to the Celtics this yr now that KG is in town, if not you should.
Lighten up, Ben. It was a joke. I like the idea and I think it will work, though I think the premise of 0 downside is silly in nature.
Any reason you prefer RGC to CNK?
Ok, sorry this market is starting to get to me a little bit. I am actually drinking right now so blog name I have definitely taken your advice.
Fresh, i appreciate your comment & am sorry for being aggressive, I think the Wokasch comment got me all riled up.
On CNK vs. RGC: These are really two different stories completely as RGC is really a low duration bond that is not growing screens but rather updating its asset base by closing low ebitda contributing screens with new theaters in better locations with higher ebitda contributing screens. RGC carries a 6% dividend yield ($1.20 annual dividend) that will likely increase (RGC has paid $17 of dividends since 2002 IPO) as RGC has a strong dividend coverage profile (2yrs of dividends in cash on the BS, an underleveraged BS, strong current biz fundamentals (Box Office is Up 17% qtd in Q3 & 7.5% ytd), numerous accretive acuisition candidates on the market currently, & incremental new secular growth drivers from its 23% stake in cinema advertiser NCMI & the coming digital cinema rollout that will begin in Q407 that will combine with the current cyclical rebound in the industry that should increase dividend coverage from 1.1x now to 2x by 2010.
RGC's 23% stake & CNK's 14% stake in NCMI will continue to provide a cash dividend each year that will likely grow by 20% CAGR through 2010. In addition, the digital cinema conversion will drive a structural shift in the economics of the business for both names as it will drive labor savings, increased inventory at no incremental cost as theaters will be able to keep more movies for longer which should drive incremental attendance as it will allow them to better serve the demand schedule...& more importantly it will drive incremental concessions sales (86% gross margin revenues). Finally, the digital conversion will allow RGC & CNK to have 3 to 4 3-D enabled screens in time for the massive rollout of 3-D movies beginning in 2009. Btw, I know the guy behind the 3-D movement & have seen the revolutionary visual product; I strongly believe 3-D movies are the future of movies, but more importantly the theater operators are realizing $2.50 price premiums currently & will likely push the premium up to $5 when major tentpole 3-D films start to be released in 2009. More important than the price premium is the fact that 3-D movies allow the theaters to offer a differentiated product from home video (DVD or VOD) for the 1st time in over 25yrs since the widespread adoption of the VCR in the US, which I believe will likely drive incremental attendance as 1) the avg. person that doesn't attend the theaters now & waits for the DVD will now have a reason to go to the theater again, and 2) there will be inceased repeat viewings at the theaters like there used to be before DVD & VOD gained widespread penetration in US households.
In comparison, CNK is much more of a growth story than RGC's flat screen growth as it is growing screens at a 3% to 4% rate annually combined with the typical attractive industry price growth in avg. ticket & concessions. In addition, CNK has a stranglehold on the Latin America Cinema market (South Americans refer to the theaters as the Cinemark...similar to how people ask for a Kleenex when they are really referring to a tissue) that is growing at an 10% plus growth rate - well above the 4% to 5% industry growth in North America. In addition, the Latin American business provides CNK with diversification away from the NA box office, something that RGC lacks & is why CNK was able to outperform in Q2 on Monday as the NA market participants are completely tied to the overall industry box office performance give or take a couple 100bps.
RGC trades at a huge premium to CNK even though I feel CNK is a best in class company that is likely as good, or at least close to as good, of an operator as industry leader RGC.
RGC is trading at 8.4x '07 Theater EBITDA vs. CNK's 7x '07 Theater EBITDA multiple. RGC carries a 6% dividend yield on its $1.20 dividend vs. CNK's $.72 dividend which actually offers an attractive 4.4% dividend yield - a yield that I fully expect to decline in the near future.
On a normal basis, I believe RGC should trade at a 5% div. yield & 9x Theater EBITDA multple which argues for a $25 stock price.
In comparison, I believe CNK should trade at a 3% dividend yield & 9x EBITDA multiple arguing for a $24 to $26 stock price.
Finally, neither stock is currently pricing in the 17% qtd box office growth that is already booked for Q307; wall street estimates are way too low right now as well as the models are all pricing in grossly understated pricing & attendance growth in Q3 as most models are calling for only 6% box office growth on 2% attendance and 4% price - assumptions that are completely different than reality and will inevitably result in upward estimate revisions in the near future.
Bottom Line, I have 1 ratings on both stocks as I am bullish on the industry & feel the heavy dividend yields & historical outperformance during recsessions & down markets whould result in strong outperformance if the market turns down as the dividends will act as valuation shields & provide strong floors on the stocks at $20 for RGC & $16 for CNK.
The most bullish thing about these income heavy stocks is that the material upside that I forecast both will realize from the digital rollout & huge 3-D opportunity is definitely not priced into the stocks currently. After this fall's release of U2R3D and Bob Zemeckis' made for 3-D wide release of Beowulf and continued investor demonstrations by my man Michael Lewis of his 3-D sample product, I anticipate increased investor interest will materialize and drive multiple expansion as this movement is the biggest structural change in the theater value proposition since color, which is more importantly boosted by a material improvement in these companies economic models as they should see higher growth & ROIC as a result. At first, investors will not be able to quantify the opportunity in either company's model as screen counts and 3-D content are not currently able to be modeled in with any accuracy, which likely means that these companies will see the same result of multiple expansion based on the incremental economic benefit that investors foresaw in LAMR & CCU as a result of the digital billboard opportunity.
Long story short, RGC is a safer investment that has downside at $20 (0% downside after the 6% dividend income) and upside to $30 within the next 18 months.
In comparison, CNK is a little riskier investment that has downside to $15 worst case scenario & upside to $26 in the next 18 months.
Both are good ideas but are definitely different stories. I like both mgt. teams but definitely have more confidence in RGC right now...which may be only b/c CNK is new to public mkt. & i have only met the mgt. twice so far.
Hope this helps.
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