National CineMedia, Inc. (NCMI)
- Company Overview
National CineMedia, Inc. was founded as a joint-venture by AMC Entertainment, Inc., Cinemark USA, Inc. and Regal Entertainment Group in 1985 to focus on cinema advertisements, and has also grown to encompass in-theatre events. National CineMedia created an advertisement and entertainment package titled FirstLook, played in theaters nationwide before feature films. Additionally, National CineMedia provides advertising content and promotional products for theaters to feature in their lobbies. Additionally, National CineMedia distributes other digital content such as music concerts, sporting events, and other entertainment features.
National CineMedia raised $798 in its February 8, 2007 IPO at $21 per share, and jumped 26% in its market debut. Its current price is $26.70, up 27% from its IPO price. The majority of its revenue comes from its advertising services, though it plans to continue to expand its other revenue streams through more large-scale, simultaneous, nation-wide digital event screenings.
- Industry
National CineMedia faces direct competition from other companies that focus on in-theater advertising, such as Screenvision Cinema Network, Cinema Screen Media, and Unique Screen Media. National CineMedia holds a strong position in the market currently, operating in approximately 14,000 screens and set to expand into more screens as their current contracts expire. Screenvision is one of National CineMedia’s largest competitors, with 15,000 screens nationally, while Cinema Screen Media and Unique Screen Media are smaller-scale competitors. Though Screenvision outnumbers National CineMedia in terms of the number of screens it operates in, National CineMedia holds a great deal of clout because it works with the two largest theater chains, Regal and AMC.
Additionally, National CineMedia also faces competition not only on theater advertisements, but also on other forms of advertisements. Cinema advertising, however, has been gaining a larger portion of advertising revenues, growing at a rate of 26% between 2001 and 2005.
Theater advertisement performance is generally not based on the film industry but rather on the advertising landscape, which is also highly dependent on the performance of the economy. The advertising sector has gained 6.54% this year to date as compared to 1.8% on the S&P 500.
- Technical Analysis
National CineMedia’s highest price in the two months following its IPO is $28.71, and its low is $24.66. With its current price of $26.70, it has gained 4.0% since its IPO, compared to a -0.43% loss in the S&P 500. Its projected one-year stock price is $30 a share.
- Fundamental Analysis
Because of the very recent IPO of National CineMedia, it is extremely difficult to make comparisons based on valuation metrics because these statistics are not yet available. Though it reported a loss in 2006 and a negative EBITDA, this was largely because of an integration agreement between Loews and AMC. Excluding the Loews agreement, EBITDA grew 27.1% to $138.3 million in 2006, a strong EBITDA in comparison to the advertisement industry.
- Valuation
Because of National CineMedia’s recent IPO, any ratios are derived solely from their fourth quarter and 2006 earnings. National CineMedia’s forward P/E ratio for 2007 is estimated at 30, compared to an average P/E ratio of 44 for advertising companies. Though it is difficult to draw conclusions about the strength of National CineMedia without more information, it appears that National CineMedia stands in a strong position in comparison to the advertising landscape.
- Investment Risks
National CineMedia’s recent IPO makes it extremely difficult to predict the stock’s performance. Because of this uncertainty, National CineMedia is a very risky investment. Additionally, with the increasing shift towards the internet as a media source, the long-term potential of the theater mechanism is also uncertain, indicating that National CineMedia may be a short-term investment rather than a long-term growth stock.
- Recommendation
We recommend that SWS invest in National CineMedia as a short-term investment, buying the stock at its current price of approximately $26 and selling at $31 per share, for a 19% return. National CineMedia holds a great deal of potential in the short-term because of the likelihood of expansion into further theater chains; as current contracts expire, National CineMedia is poised to not only gain in terms of distribution but also in its advertising sources. Though the cinema may be in danger in the long run, films currently provide advertisers with an ideal marketplace, which is reflected in the increasing use of this medium of advertisement; National CineMedia stands to gain from this trend. An analysis of available metrics supports this potential for growth in this company. Though National CineMedia is a young and thus risky company, it also presents an opportunity to gain a great deal by getting involved with a potentially strong company early on.