Analyst Says Not The Time To Buy Theater Owners Despite Strong Box Office Ahead

As part of a sector-wide downgrade for the movie exhibitors' industry, Credit Suisse analyst Omar Sheikh cut his rating for AMC Entertainment (AMC) and Regal Entertainment (RGC), as well as IMAX (IMAX) and National CineMedia (NCMI), despite a strong domestic box office expected in 2017 and 2018. This follows recent bullish comments on Walt Disney (DIS) by Wall Street analysts, who particularly highlighted the company's upcoming "strong film slate."


INDUSTRY-WIDE DOWNGRADE: In a research note to investors, Credit Suisse's Sheikh downgraded AMC Entertainment to Neutral from Outperform, saying he believes the shares now look "fairly valued" relative to history and relative to peers. Further, with a strong domestic box office in 2017/18 now widely anticipated, the analyst noted he sees only "modest upside" from current levels. Sheikh pointed out that his lower rating for AMC is part of an industry-wide downgrade, as he sees limited scope for earnings forecasts to rise, slowing growth in key revenue drivers including attendance per average screen and concession revenue per patron, and limited upside to trading multiples. The analyst also cut his rating for Regal Entertainment to Underperform from Neutral, saying he sees ticket price and concessions revenue growth continuing to trend lower. Sheikh highlighted the risk that some studios may explore a change to the exclusive exhibition window, while noting that Regal's largest shareholder may continue to sell. Another name that was downgraded by the analyst was IMAX, which was cut to Neutral from Outperform. Sheikh told investors that he sees balanced risk/reward at current levels, given the strong movie slate in 2017/18, slowing growth in China, the likely 1-2 year period before payback comes through on investments in new initiatives, and the full current multiple that leaves little margin for safety. Lastly, Credit Suisse's Sheikh downgraded National CineMedia to Underperform from Outperform as he believes 2017 will be a tough year for cinema advertising, which suggests there could be limited scope for the company's inventory utilization and CPMs to grow. After polling a network of U.S. advertisers on a range of questions about their spending intentions, the analyst pointed out that they appear to be looking to reduce exposure to cinema.

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