Why Cinemark Rallied After Its Third Quarter Results

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On November 6, Cinemark shook off weak third quarter results to end the day up 2.5%. Cinemark's top and bottom line both took hits this quarter. Shares of the movie theater operator fell at the beginning of the week as well because of an unfavorable regulatory decision. However, the stock still rallied as Cinemark was able to explain the situation in terms that supported the bull case for the company.


The overall results

Revenue dropped by $111 million to $647 million even though the average ticket price and average concession sales both increased. This indicates that fewer people visited Cinemark's theaters, which the movie theater company admitted in its earnings release; overall attendance fell from 81 million in the prior quarter to 66 million, as domestic attendance dropped from 51 million to 43 million.


However, the company explained that the theater industry had a good quarter, in general, in the fall of 2013; as always, Cinemark and the other theater operators depend on the studios releasing popular movies, so the company may have simply had a weaker slate this quarter. Nevertheless, Cinemark did show improved pricing power, which it could retain in upcoming quarters if more popular films come out.


Latin America

One of the main attractions for investors in Cinemark is its presence in Latin American countries, which could offer stronger growth than the domestic movie theater business. This quarter, Cinemark was able to highlight its strength in this area even while posting weaker results in the region. International attendance and pricing showed the same trends as the domestic metrics; international attendance fell from 30 million to 23 million, but ticket prices and average concessions both increased. So Cinemark looks like it has international pricing power as well. The company blamed the World Cup in Brazil for the drop in attendance; again, this is a short term factor and sets the company up for an easier comparison in 2015.


Movie theater ads

With the post-earnings rally, Cinemark recovered from a drop earlier in the week that occurred because of an antitrust action by regulators. Cinemark owns a stake in National CineMedia, also a publicly traded company, and so do peers AMC and Regal; this company manages the ads that appear on the screen before movie showings. National CineMedia was planning to merge with competitor Screenvision, but the Justice Department decided to stop the deal because the merged company would control the vast majority of the market for movie ads.


However, once again Cinemark's operations in Latin America could provide additional support for its shares. The company also shows ads before its movies in Brazil, Argentina, and other countries; in its most recent 10-K, it explains that Flix Media provides these services in Brazil and the company plans to have this subsidiary handle movie theater advertising in Argentina as well. Unlike National Cinemedia, FlixMedia is fully owned by Cinemark, so the movie theater operator does not have to share the revenue from this subsidiary with other domestic theater operators.


Conclusion

A weak third quarter doesn't eliminate Cinemark's advantages. Attendance in international markets could pick up again now that the World Cup is over, and with Flix Media this could also result in more ad revenue for the movie theater operator. This subsidiary could insulate Cinemark from any problems that occur if the Department of Justice does manage to stop the National CineMedia deal as well. So investors had reasons to buy Cinemark shares on Thursday.


*Image by Cinemark

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