2023-11-22 23:29:01 ET
Summary
- Cinemark Holdings, Inc. has reported strong Q3 2023 results, with an EPS of $0.61 and a revenue increase of 34.5%.
- The company has made strides in enhancing its bottom line, generating cash flow, and strengthening its balance sheet.
- Cinemark's upcoming movie releases and planned expansion suggest potential upside in the recovering market.
In July, I gave Cinemark Holdings, Inc. ( CNK ) a hold rating due to factors such as negative earnings, uncertainty about the summer month revival potential, slower growth in comparison to competitors, and high debt intake. Concurrently, the market sentiment was characterised by a notable short interest of 22.93%. The subsequent months witnessed a decline in Cinemark's stock value by 8.65%. However, this decline does not reflect poor performance. On the contrary, Cinemark's recently disclosed Q3 2023 results revealed an EPS of $0.61, surpassing expectations by $0.19, alongside a year-over-year revenue increase of 34.5% to $875 million. Notably, the company has made strides in enhancing its bottom line, generating cash flow, and strengthening its balance sheet. Despite the current stock volatility and the market's adverse reaction to a robust quarter, the company's upcoming movie releases and planned expansion of new screens suggest a potential upside in this recovering market. Therefore, I am upgrading my position to a bullish stance.
Company updates
In my previous article , I provided an overview of Cinemark Holdings, positioned as the third-largest cinema chain in the US based on screen count, boasting a substantial 5,765 screens distributed across fourteen countries. Notably, the company has augmented its US market share, progressing from 13% in Q3 2019 to 14%, trailing behind AMC Entertainment ( AMC ), the market leader with 23%, and Regal with 16%. Furthermore, Cinemark has established itself as the market leader in Brazil and Argentina within Latin America, witnessing an expansion in its regional market share from 23% in Q3 2019 to 25% by Q3 2023. In Q3 2023, the company entertained almost 62 million visitors throughout the US and Latin America.
Cinemark Holdings' revenue sources revolve around two pivotal pillars: admissions and concessions. The company witnessed a 36.7% YoY increase in admissions revenue, reaching $443.8 million, showcasing an impressive uptick in audience engagement. Complementing this growth, concession revenue surged by 34%, reaching $339.8 million, propelled by an increased attendance of 61.9 million moviegoers. Globally, the average ticket price was $7.17, while the per-patron concession revenue averaged $5.49. These figures not only underscore Cinemark's ability to attract audiences but also highlight its proficiency in growing revenue through concessions.
Given ongoing disruptions within the entertainment landscape, the cinema industry's potential recovery remains uncertain. However, historically, the industry has demonstrated resilience and continued growth despite such challenges. Encouragingly, recent global trends have shown significant growth over the past year, indicating positive momentum toward potential recovery within the sector.
Examining potential growth catalysts, Cinemark unveils plans to launch four new theatres and introduce 41 screens within the upcoming two-year span. The company is strategically focused on enhancing the guest experience by leveraging initiatives like the Movie Club subscription program, integrating luxury lounger seats, and offering premium large-format viewing, accompanied by an expanded range of food and beverage options. Moreover, the anticipation of numerous unreleased films in 2023 and a promising lineup of major releases scheduled for 2024 presents a potential avenue for further growth and upside potential for the company.
Financial updates
It's compelling to note the TTM revenue and gross profit recovery trends. These indicators surpass the performance of the three preceding financial years and are approaching the figures recorded in FY 2019. This trend is particularly promising within a market that is still in the process of recuperating. Additionally, the observed positive trajectory in cash flow generation and enhancements in the balance sheet further contribute to the optimistic outlook for the company's financial standing.
In the recent Q3 2023 results, Cinemark showed impressive growth: an EPS of $0.61 exceeded expectations by $0.19, while revenue soared by 34.5% to $875 million. Adjusted EBITDA reached $196.8 million, doubling from a year ago with a 22.5% margin. The company reported a net income of $90.2 million, a significant turnaround from the prior year's $24.5 million loss. Looking at the trailing twelve months, income improved to $106.9 million, signalling sustained progress over the past three financial years.
In Q3 2023, the company generated $50 million in free cash flow, marking a noteworthy performance. Examining the TTM, the levered free cash flow has notably risen to $238.1 million, surpassing the figures from FY2019. This increase signifies a positive trend, offering opportunities for reinvestment into the business, potential investor rewards, and the possibility of debt repayment, reflecting the company's strengthened financial position.
Reviewing the balance sheet, the company holds a total cash reserve of $806 million. Despite a notable net debt level, the next maturity date isn't until 2025. Moreover, the company has successfully reduced its net debt and maintains adequate liquidity to address short-term obligations, evident from a quick ratio of 1.44, indicating its capability to cover immediate liabilities with its liquid assets.
Valuation
When comparing Cinemark to its industry counterparts like AMC Entertainment Holdings ( AMC ), Cineplex, Inc ( OTCPK:CPXGF ), and IMAX Corporation ( IMAX ), distinct valuation metrics emerge. Notably, against AMC, its larger competitor, Cinemark displays a GAAP TTM price-to-earnings ratio of 17.46. In contrast, AMC hasn't reported positive earnings within the same timeframe. Cineplex, which faced significant stock devaluation due to a legal dispute with Cineworld, stands out with a lower price-to-earnings ratio of 3.68, suggesting an appealing valuation. However, Cinemark showcases promise when considering its EV-to-sales ratio of 1.49 in comparison to its peers. This ratio potentially signals an undervaluation and hints at the company's potential to yield more profits in the future.
Risks
Investing in cinema stocks presents risks owing to the substantial shifts in the industry and evolving consumer behaviours, making it challenging to predict a return to pre-COVID-19 levels of movie attendance. Ongoing writers' strikes have impacted movie releases, potentially reducing audience turnout and subsequently affecting Cinemark's financial performance. A decrease in movie offerings might deter potential viewers, influencing Cinemark's earnings. Additionally, Cinemark's comparative lag in international expansion, particularly in contrast to its peers leveraging booming economies like China and India, represents a potential missed opportunity for broader market growth.
Final thoughts
Based on the robust Q3 2023 results, strategic growth plans, and promising financial trends, I recommend upgrading to a bullish stance on Cinemark Holdings, Inc. ( CNK ). The company's impressive performance, surpassing earnings expectations by $0.19 and achieving a notable revenue increase of 34.5%, signifies a positive trajectory. Cinemark's commitment to enhancing the guest experience, coupled with strengthened cash flow and improved balance sheet metrics, positions it well for sustained growth. While acknowledging industry uncertainties, the company's resilience and proactive measures underscore its potential for continued success.
For further details see:
Reviving Cinemark: A Bullish Outlook Amidst Growth And Resilience