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Coverage Initiation: National CineMedia, Inc.
National CineMedia, Inc. (NCMI) was incorporated in 2006 to operate National CineMedia, LLC. The latter entity was formed in 2005 by the three largest U.S. movie theater companies, AMC Entertainment (privately owned), Regal Entertainment Group (RGX), and Cinemark Holdings (CNK) to run their in-theater advertising and events showing businesses. National CineMedia now owns 48.6% of National CineMedia LLC, with the balance held by the three founding companies. NCMI went public in early 2007, using the proceeds of the IPO and funds from a debt issue to purchase the business from the founding companies.
National CineMedia’s network comprises over 18,000 movie screens in about 1,400 movies theaters in 47 states and the District of Columbia, with theaters in all of the largest 25 markets and 49 of the 50 biggest. About 87% of NCMI’s screens are owned by the three founders, and NCMI has the right to use them under contracts that last over 20 years. The company estimates that 72% of the movie attendees in the top 10 markets see its advertising, and 67% of those in the biggest 50 do so. Advertising contributed 89% of revenues in 2010. The balance was derived from other live and pre-recorded consumer entertainment events, such as concerts and sports, and also from corporate meetings, church services, and other events shown in the network theaters. The Metropolitan Opera Company of New York is the biggest customer in the events segment.
National CineMedia has grown by extending its network as the founders add more screens and also through affiliate agreements with other theater owners. In 2011, it plans to lift its screen count by about 8%. NCMI has also increased its prices, the cost per thousand “impressions’’ that it charges, in most years, though it did have to accept a 5.7% price cut in 2009 as a result of the recession. The company is installing new digital equipment in its theaters, and by the middle of 2012 it expects to have the upgraded projectors in 90% of them. That should boost ad revenue, as the new equipment makes possible three-dimensional ads, which garner 50% to 100% more than 2D spots. Its utilization, or the portion of advertising time sold, has also increased, and that will probably continue. NCMI currently has about 220 advertisers, concentrated in consumer goods and services, and it is seeking to broaden its customer roster to include more healthcare and financial service companies; it added 50 new names in 2010.
National CineMedia should benefit from several factors. Among the important age 18-34 demographic, National CineMedia’s network ranks first on weekends and sixth overall, ahead of such popular youth-oriented networks as USA and Comedy Central. In- theater advertising will likely continue to grow faster than total ad spending, since it is relatively new and now accounts for less than half a percent of the U.S. total of around $165 billion. Moreover, ad recollection is much higher in movie theaters, perhaps for the simple reason that it is impossible to “turn it off’’. And movie advertising will likely grow over the next year, because this year’s “upfront’’ television ad sales sessions went well, suggesting higher scatter ad prices for TV time in the coming season.
National CineMedia should profit from a growing network, higher prices as it introduces 3D equipment, and likely higher utilization. Its capital requirements should remain low, as the theater owners bear some of the cost of equipment replacement. The company just raised its dividend 10%, to an annual rate of $0.88 a share, or around 6.8% after the recent stock-price decline. In sum, we think National CineMedia shares provide another option for income seekers, and the stock price should also rise in response to higher dividends.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.