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CKEC - Carmike Cinemas


Homestead31
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stock back down to where Mittleman Bros made it a ~10% position a few months back.

 

i haven't done the deep dive, but it looks very interesting. 

 

Carmike basically owns movie theaters in smaller cities/towns in middle america - think local monopoly b/c the next closest movie theater might be 30 miles away.  importantly, while traffic in general hasn't been growing over the last few years, this business is pretty much recession proof.  revenues barely budged during the great recession b/c this is affordable entertainment - trips to the ball game etc get cut out way quicker than trips to the movie theater when the economy stalls.

 

they don't have the same scale as the big boys so they aren't as profitable on the movie side, but their concessions are best in class.  they also charge significantly less than big city movie theaters, so in theory room to raise prices.  importantly, in small cities there are fewer options for entertainment outside of the house.  i know the traditional argument against movie theaters is that the in home experience has gotten so good that people don't need to go out anymore, but i think that is less viable in smaller towns where there is just less to do.  people don't want to just sit at home every night, and with limited local options for entertainment going to a movie is a great option for date night etc.

 

the industry has been consolidating, and upgrading facilities including food service, nicer seating, etc... that has obviously meant higher capex recently, but it seems to be driving profitability and capex should roll off shortly.  CKEC has room to grow as a consolidator, but also makes a nice acquisition target for the big boys who could wipe out corporate level costs and widen gross margins due to their better terms with the studios.  there has been frequent chatter about CKEC being on the block in the past. 

 

As far as i can tell the stock has gotten whacked the past 2 days b/c AMC is down b/c their CEO is leaving, and he was considered best in the business.  shouldn't carry over to CKEC.

 

i am a long term thinker, but in the short term there is a big slate in the coming months with Star Wars the obvious big one that should drive traffic.

 

all thoughts appreciated

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I have a small position in CKEC.  I agree with all your points.  I think the theatre business deserves at least a 10x EBITDA multiple.

 

For 2016, I have them doing $809M in revenue and ~$130M in EBITDA.  At 10x EBITDA, after backing out net debt, that's an equity value of $943M, or $39 per share.

 

These are great businesses with a strong history of pricing power.  I agree -- in small towns, going to the movies is a big deal.  Perhaps the risk or market fear here is that people will just watch from their homes?  Maybe...but the biggest demographic (teens) wants to get away from mom and dad.  They do that by going to the movies.

 

I was annoyed to see the CEO selling shares a few months ago.  So maybe they know something we don't.

 

No view on this movie theatre shooting...tragic, of course.

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These are great businesses with a strong history of pricing power.  I agree -- in small towns, going to the movies is a big deal.

 

I'll give the bear case. I don't see movie theatres as being able to dictate prices (especially the smallest chains in less populated areas). The big-6 movie studios are currently being investigated in the EU for anti-trust actions (probably forcing movie theatres to take all their movies, not just what they want to show, and for raising prices way too often). As I have understood the industry, prices are dictated by content creators (movie studios, in this case) and movie theatres become price takers. I have always understood that movie showings, in general, are extremely low-margin businesses and it is the concession stands that provide the lion's share of profits. Thus, if movie studios increase costs of movies such that theatres have to raise their prices faster than CPI/GDP, then eventually volume/foot traffic will decrease (even if revenue is stable or increasing) and profits and/or profit margins should take a hit. I personally don't like the long-run outlook of the industry (ignoring the entertainment substitutes argument). If you were to look at the movie theatre industry, I would be shocked if you found that profits have increased at a faster rate than revenue/seat over the decades. Are you just assuming there is pricing power here or can you share what led you to believe this (it's pretty rare for pricing power to appear anywhere)?

 

Movie tickets prices have increased by ~3.8% compounded since 1974 to 2013 (assuming $1.89 and $8.13 avg ticket prices, respectively). I think $8.13 is probably on the low-end of the current "true" average ticket price, so maybe it's 4.0% - 4.5% inflation. In their 1995 AR, CKEC had 445 theatres with 1,942 screens (4.36 screens/theatre). Their 2014 AR shows 274 theatres with 2,897 screens (10.57 screens/theatre). I think this provides some evidence to support that theatres do need a minimum amount of foot-traffic per theatre to break-even and they now require a greater density of screens/theatre to do this. This leads me to believe that rural movie theatres will likely underperform moving forward. Film exhibition costs have increased from 49.1% (1992) of Admissions revenue to 55.1% (2014). Other theatre operating expenses have also seem a tremendous increase as a % of admission revenue. This is creating a situation where they are even more dependent on concessions profits to balance their overall profitability. However, as gross margins on concessions are forced higher, the "sticker-shock" of concession prices is bound to become more egregious and result in lower concession $'s/admission.

 

I have a friend that owned a small rural theatre from 1995-2003 or so and he said that for the first 2 weeks of showings (or 4 for blockbusters), the studios received 95% of admission revenue and it dropped to ~50% for weeks 3-4 (or 5-6). There's also the issue that newly built theatres are more profitable than existing ones, which is a well-known recipe for terrible returns.

 

Finally, 50% upside seems pretty low since a large portion of your expected returns will likely come from EV/EBITDA reverting to mean (that is, most of your returns will likely come from the narrowing of this 50% upside, if it happens). There's risk of movie theatres companies or the market as a whole being repriced during your holding period and I don't see CKEC generating reasonable operating returns to make up for this. You really need everything to go wonderfully to get a decent return.

 

http://www.usatoday.com/story/money/2015/07/23/eu-antitrust-case-movie-studios/30556381/

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Interesting. I'm skeptical about LT demand for these people; I do think that online is going to have a much bigger impact going forward than it has in the past. And there's just not any demand growth; U.S. attendance has dropped from 1.5 billion about a decade ago to 1.34 billion today, though revenue for the industry is up basically from pricing.

 

That doesn't mean this one isn't a good buy today, or even that the industry as a whole isn't. Domestic tobacco has seen volume declines for a long time, but equity has done well b/c of pricing power for their addictive product and b/c most advertising is banned = lower costs and glacially changing market share.

 

I'm not sure theaters exhibit the same sort of characteristics. The big spook is cutting them out entirely; can take a ton of expenses out of the system by doing so, potentially letting studios offer content cheaper to see if they can't get on the right side of the price elasticity of demand as well as taking back the customer relationship to allow for better cross and upselling opportunities.

 

I have a hell of a time seeing how the world doesn't trend that way to be honest, but again, that doesn't mean this is a bad investment necessarily. Worth looking at in any case.

 

Thanks for sharing.

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thanks for your thoughtful response schwab.

 

as for pricing power, i actually meant that CKEC's average price is lower than the national average ticket price, so maybe some room for price increase there.  obviously CKEC's theaters are in more rural locations, and entertainment spending (and income) are likely lower than in bigger metro areas so maybe not.  however, there are fewer entertainment options and fewer movie competitors, so maybe yes.  it is also worth noting historical price trends of movies vs. other entertainment.  as you noted, movie pricing has increased at basically inflation + 100 bps or so....  that is a mere trickle vs. what has happened to pricing for ball games, concert tickets, and even restaurant menu prices.  obviously we are dealing with apples and oranges there, but assuming that on some basic level people want to leave their houses and do something fun and social, it seems that over time either 1) prices at movies will move up or 2) movie attendance will increase as the stagnant prices vs. exponential price increases at alternatives makes movies relatively more attractive.

 

i agree that the studios control pricing power on the % of the door that they take, but as CKEC continues to gain scale they should be able to lever that into a better split with the studios, although CKEC mgmt has said they don't see that as a huge opportunity. 

 

As was later pointed out, concessions seem to be the real opportunity as theaters are going more upscale with their food and beverage service.  additionally, as you mentioned # of screens per theater has been trending up for some time - this is a good thing, and the old data isn't very useful in my mind.  more screens per theater = greater fixed cost leverage, ie fewer total ticket takers, less total square feet dedicated to concessions, etc etc.  this is clearly the trend, and the company has been taking advantage of this trend by exiting or upgrading smaller locations.

 

as for 50% upside (based on Moht's numbers, which are close to mine) not being enough, i would say that the margin of safety should be inversely related to the quality of the business.  while your longer term points certainly may be valid, i think as is often the case when people think "old model" businesses are going away the pace of decline is typically glacial.  CKEC is a business that didn't skip even half a beat through the great recession.  in fact, one could argue that a recessionary environment might even be good for CKEC as consumers tighten their belts and go to more movies and fewer ball games/ nice restaurants, etc.

 

your point that the investment return is dependent on the multiple is well taken, but there is definitely room for growth here as the movie theater industry remains fragmented, and as theaters can be upgraded to include full service dining etc that is high margin.  most important, there doesn't seem to be much room for multiple contraction: the downside seems secure here for the moment.

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CKEC looking very cheap post earnings.

 

YoY they reported a 14% rise in attendance, 20% rise in EBIT, and a 25% rise in theater level cash flow,  but the stock traded off as much as 20% after hours yesterday and ended today down 7% because they disappointed vs. sell side estimates.  personally, i'm just find with a 25% disappointment.

 

the negative is that gross margins were pinched by film exhibition costs (gross margin) by 270 bps.  As Schwab astutely pointed out, this is the big concern... are movie studios going to take an increasing share of the pie?

 

impossible to know, but this past quarter was somewhat of an anomoly b/c the better box office was tied to a very small number of films - really just 5.  the way it works is that the movie studios get a bigger cut of the bigger movies, so in a quarter with a few blockbusters but not much on the fringe gross margin suffers.  in my mind, this is somewhat cyclical - at times there will be more blockbusters, and at times there will be more run of the mill films, although the studios are trying to tilt toward more blockbusters.  regardless, CKEC is cranking margins on concessions and aggressively trying to grow alternative programming to diminish the impact of the blockbusters.  in my mind, at less than 5x theatre level cash flow, CKEC is a steal right now.

 

yes there is uncertainty w/ the gross margins, but the business continues to grow both at the unit level and system level, revenues are recession resistant, and private market value here is probably 2x what the stock currently trades for b/c a strategic acquirer can benefit from wider gross margins, and wipe out the corporate level opex.  this matters because consolidation is a big theme here.

 

i understand the concerns that schwab presciently raised, but thats what the margin of safety is for. this is a cash cow, and it is super cheap.

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  • 1 month later...

good article: http://www.barrons.com/articles/carmike-cinemas-eyes-blockbuster-50-gain-1438119014

 

key excerpt:  "While the sale talk has died down, it’s still possible that Carmike could be an acquisition target, as the industry consolidates. Just a few weeks ago, AMC Entertainment ( AMC ) announced that it was buying Dallas-based Starplex Cinemas, an operator of 33 theaters for $172 million.

 

In his July investor letter, Chris Mittleman, the chief investment officer of Mittleman Brothers, a longtime Carmike shareholder, wrote that the AMC deal price equates to $497,000 a screen for Starplex. When he applies that multiple to Carmike, he winds up with a price of $44 a share for Carmike’s stock."

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Thanks for the summary. Overall, CKEC's theaters seem to be doing well and they seem to be strong operators, especially with concessions. Main concern from analysts seems to be film exhibition cost. Theaters don't have the power to negotiate, so there's one risk. Another risk is that studios are more focused on downstream revenue. I'd like to read some industry reports before deciding to invest.

 

I see lots of M&A activity with theaters. At 8x EBITDA, fair value would be $30ish, a nice upside from current price.

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  • 2 weeks later...

http://www.cnbc.com/2015/10/07/grazer-mid-budget-character-driven-films-will-come-back.html

 

despite the source, i thought this was an interesting piece.  as noted above, the main complaint against theaters - CKEC in particular - is that margins are under pressure as studios take a bigger piece of the pie.  however, if you listen to what management says, studios only get a bigger piece of the buy on the tent-pole films.  as noted in the article, the recent trend in film production has been a hollowing out of the middle and a move toward proven formula tent poles (which explains why it seems like every movie these days is a sequel, a re-make, or involves a super hero) which are lower risk for the studios.  however, it seems that there is a case to be made that this trend is running its course, and a return to the middle ground movie is in the cards.  this would be beneficial to margins for theater owners. 

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  • 3 weeks later...

Oasis Capital filed a 13D here about a week ago.  This industry is consolidating.  For a long time the street thought CKEC was up for sale, but then management backed away from that story line and became an acquirer.  Seems likely that the 13D is related to pushing management to go back down the "for sale" route.  This is real cheap on a strategic basis.  Surprised at the lack of interest here on the boards.

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  • 4 months later...

http://www.cnbc.com/2015/10/07/grazer-mid-budget-character-driven-films-will-come-back.html

 

despite the source, i thought this was an interesting piece.  as noted above, the main complaint against theaters - CKEC in particular - is that margins are under pressure as studios take a bigger piece of the pie.  however, if you listen to what management says, studios only get a bigger piece of the buy on the tent-pole films.  as noted in the article, the recent trend in film production has been a hollowing out of the middle and a move toward proven formula tent poles (which explains why it seems like every movie these days is a sequel, a re-make, or involves a super hero) which are lower risk for the studios.  however, it seems that there is a case to be made that this trend is running its course, and a return to the middle ground movie is in the cards.  this would be beneficial to margins for theater owners.

 

Every 7-10 years a style/genre/type of movie is popular.  Super heros have not run their course.  It is more along the lines of CGI having run it's course.  No one cares that you have a 5 mile long space ship in the sky (Talking to you Independence Day 2).  I hope we see more of Deadpool.  Why?  It was rated R but I think people are missing the fact that a lot of it was done in practical effects.

 

In the 80s it was over the top action movies.  I'm sure westerns had a popular time (before my time).  Ya, we'll move onto something else as a culture.  What it is though is yet to be seen.  AS for reboots and remakes, people are getting fed up with watching their childhoods get ruined.

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CKEC has historically had the worst assets of the other public comps.  I seriously doubt they get a higher price.  Cinemark would basically be the only other acquiror, and they are fairly disciplined--and focused more on international growth.  AMC, at this point, is "foreign money."

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http://www.wsj.com/articles/carmike-cinemas-shareholder-demands-better-terms-in-amc-deal-1457482404

 

Mittleman opposing the sale.

 

Roark, would be curious about your "worst assets" comment.  They are in smaller markets, and thus get less revenue per screen, but they also have the best concessions in the biz, and as studios gain power, concessions are more valuable.  they also have pricing power based on their pricing be far below more urban markets.

 

to be clear, i am not saying they have special assets or anything, but i'm not sure they have the worst.. maybe just different.

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CKEC typically targets smaller cities, but when those cities become larger, Cinemark and AMC come in and build a newer and nicer theater, thus destroying CKEC's old theater.  This threat isn't there as much with CNK and AMC because they are building theaters in already mature markets. 

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  • 2 months later...
  • 2 weeks later...

I've recently sold a third of my portfolio to redeploy it to CKEC at $29.70-29.90.

In my view, this is among the most compelling risk-rewards in the current environment. I do not see AMC pulling its offer. Downside case: taken out at $30.

Upside case: AMC boosts offer. I do not see $36 as unrealistic.

 

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So I'm in this trade as well, through the July and September 30 strike calls, purchased at .43 and .60 avg cost respectively - but I would say the downside case is not $30.  (obviously with the 30 strike calls MY downside case is -100%).  If the deal just fails to win shareholder approval with no other developments, the shares could fall.  There were no other bidders after all.  With Mittleman and Driehaus and now both major proxy advisory services working against the deal - it may get a bump by AMC before the meeting, but I'm not counting on it.  The calls were simply a decent asymmetrical bet and I have taken half my position off at these prices so I can't lose my original investment.

 

Will be interesting to see the outcome, thats for sure..

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Interesting; looks like a nice trade.

 

If the offer is voted down, stock may decline but longer-term the transaction economics are just too compelling for AMC, especially given that CKEC's shareholders are rational and willing to deal (at the right level), so I think AMC would eventually come back to the table. There's value there, and that value will be split (somehow, but likely not at $30).

 

 

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