Making much ado about make-goods

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Similar to in the TV world, in the cinema advertising business a "make-good" is when an ad must be rerun for free if theater attendance falls short. Apparently, some investors worry that make-goods are about to dent the earnings of recently public movie screen ad firm National CineMedia.

Such concerns are overblown, Pali Research analyst Richard Greenfield wrote in a report last week, reiterating his "buy" recommendation on National CineMedia and his $31 price target.

Nonetheless, the stock hit a new low of $24.28 on Friday and closed at $24.68 Monday.

According to Greenfield, the company owes some make-goods when boxoffice performance shrinks year-over-year in any given quarter. Attendance was up 5% in the first quarter, but down 2% in the second quarter. So far, it's up 5% in the current quarter and more than 2% for the year to date.

Make-goods for National CineMedia, though, are also determined by comparing the performance of films with similar ratings, making things tougher to gauge for investors and analysts.

"While we do not know how attendance by rating category broke down in these periods, we do not believe there was an unusual level of need for make-goods in any of them," Greenfield wrote.

Greenfield's enthusiasm for National CineMedia comes despite an assumption that movie theater attendance will decline modestly over the next decade. That's partially because he likes the growth prospects of cinema advertising, where commercials are fed on a big screen in a dark room to captive audiences.

He's also bullish about National CineMedia's smaller initiatives. Smaller for now, that is.

For example, the event business is a "wide-open opportunity," he writes, citing examples like a Linkin Park concert shown in 98 theaters for $12.50 a ticket; a Drum Corp. competition in 236 theaters, also at $12.50 a ticket; and a "Dirty Dancing 20th Anniversary" movie night in 307 theaters for $10 a seat.

Out-of-home digital advertising in general -- which is the space National CineMedia plays in -- "is an industry that is still in its infancy and has tremendous growth potential over the next several years," he said.

Finally, Greenfield likes the company's investment in Ideacast, which has put digital screens in health clubs and sells advertising on them. Such an investment, he said, "offers significant long-term growth opportunities that are not reflected in our current model."
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