September 21, 2009
Written By Admin
Up-and-coming star National CineMedia, Inc. (NCMI 15.72 NasdaqGS) operates the nation’s largest in-theatre advertising network. Theatre advertising is a cushy duopoly with formidable barriers to entry. In fact, the entire industry is dominated by just two firms, which combined have agreements with over 90% of the nation’s 38,000 screens. But one player has a clear advantage over the other – it was founded by Regal Entertainment, AMC Entertainment and Cinemark – the nation’s top three theatre chains. Today, those founding members (which represent 40% of all U.S. movie attendance) still retain a 58% ownership stake. And NCMI has locked up all three to extended 30-year contracts. A stretched balance sheet is somewhat of a concern. But current cash flows are sufficient to meet interest obligations with enough of a surplus on hand to still dish out dividends. Going forward, I am confident that cinema advertising will capture a larger slice of the revenue pie as companies awaken to its higher return on investment. Still, I would demand a large margin of safety before taking a position. The potential rewards easily outweigh the risks with the shares trading at less than half price.
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