Value Line recently initiated coverage of Carmike Cinemas (CKEC) in its flagship product, The Value Line Investment Survey. The motion picture exhibitor was founded in 1982 by Carl L. Patrick after he purchased Martin Theaters. The company operates solely within American borders, with 249 theaters and 2,359 screens located in 35 states.
Based in Columbus, Georgia, the company focuses mainly on rural and suburban markets with populations fewer than 200,000. As “America’s Hometown Theater,” Carmike is markedly different than many of its larger industry peers. While Regal Entertainment (RGC), Cinemark (CNK), and others also declared bankruptcy in the early 2000s as a result of exorbitant spending on growth despite the leveling out of attendance rates, Carmike is less at risk to falling into the same hole again. The small market focus offers it a sort of niche appeal, while also keeping operating costs low. What’s more, since an executive shakeup that promoted current CEO S. David Passman III to the role, the stock has climbed from $1 to its current, loftier level.
The turbulent state of the domestic theater industry, battling with lower attendance rates and a slumping box office, has compelled theater operators to look for supplemental revenue in the form of digital projection screens. One of the few victors of the recent box office has been IMAX (IMAX). The Canadian company fills seats by offering a moviegoing experience that cannot be matched. Equipped with larger-than-life screens and cutting edge sound systems, its screens are not easily duplicated on even the most spectacular home theater. These IMAX and 3D screenings demand a premium price, usually an extra dollar or two per ticket. So, while companies like Regal have rolled out similar technology in an effort to steal away market share from IMAX, Carmike focused on a full digital overhaul of its 2,000-plus screens. As a result, the company is among the industry leaders in digital capabilities, with over 90% of its screens operating as 3D ready. This offers more flexibility with show times, as theaters can add more screenings to cater to audience viewing habits depending on the blockbuster du jour on a particular weekend.
Also concerning for the company is the quality of Hollywood’s output. While there have been surprise box office success stories in recent years, from Magic Mike to G.I. Joe: Retaliation, there have been as many, if not more, spectacular failures, such as 2012’s Battleship and John Carter. And while the summer usually offers some seat-filling flare in the form of franchise installments and A-list actor vehicles, the industry will need a more sustained year-round effort to keep theaters operating.
As the movie industry focuses more on emerging regions across the globe, companies like Carmike that only operate stateside could start to feel increased margin pressure. Brazil and Argentina saw their 2012 box office grow 25% and 18%, respectively, in the recent quarter, while America’s declined again. Asia and the Pacific region also favors international companies, as there are still nary enough screens to accommodate the massive population on the continent. We believe Carmike stands more than a fighting chance to grow earnings well into the future by sticking to its niche strategy and continuing to operate efficiently.
Subscribers interested in owning a piece of this small cap movie theater exhibitor are advised to consult Value Line’s quarterly reports for Carmike Cinemas, as well as any supplemental reports and relevant articles as important news items arise.
At the time this article was written, the author did not have positions in any of the companies mentioned.