Analyst Upgrades Stocks of Exhibitor Cinemark, National CineMedia

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Lazard's Barton Crockett says he likes the exhibition sector due to recent stock declines and easing box office comparisons and highlights that "historically, box office is not correlated to the economic cycle."

NEW YORK - Lazard Capital Markets analyst Barton Crockett believes that now is the time to buy select movie theater industry stocks as recent stock declines provide a good entry point for investors, particularly those concerned about a potential relapse of the U.S. economy into recession.

Crockett likes the exhibition sector at this stage. "The third-quarter domestic box office is pacing a few percentage points above the flat assumption in our model," he said. "Comparisons are unusually easy in the fourth quarter and first quarter 2012, creating potential for robust growth and upside to our estimates."

Importantly, he also said that "historically, box office is not correlated to the economic cycle." His analysis shows that, if anything, box office fares slightly better in a recession. Box office in recession years from 1973 to 2009 has averaged growth of 6 percent, better than the 5.7 percent in all years in that time frame, and attendance has been similar, he said.

Crockett on Wednesday upgraded the stocks of movie theater chain Cinemark Holdings, which closed Tuesday at $19.24 after in late May hitting a 52-week high of $22.09, and cinema advertising firm National CineMedia, which closed at $14.41 after earlier in the month hitting a 52-week low of $11.21. He moved his rating on bit stocks from "neutral" to "buy," but didn't change his "neutral" rating on exhibition giant Regal Entertainment Group.

The stocks all opened higher on Wednesday.

"Cinemark stock is near where it was a year and a half ago, even though domestic and international outperformance has driven over a 10 percent hike to our [operating cash flow] outlook over that period, despite disappointing industry box [office], creating a compelling entry point for a leader in a defensive industry entering a period of easy comparisons," Crockett said in a report. He has a $25 price target on the stock. "Cinemark has outperformed peers in domestic box growth every quarter since the fourth quarter of 2008."

Plus, the circuit’s Latin American unit has seen growth that has exceeded the U.S. industry, Crockett added. That has left financial growth "well above peer Regal’s," he added.

In upgrading National CineMedia with a $20 price target, Crockett cited "high visibility into robust ad growth and valuation versus past averages that ranks as the most depressed in our coverage group, plus a call option on a potential merger with rival Screenvision."


Twitter: @georgszalai