Movies are really back – NCMI risk-reward is excellent

It’s official – movies have returned to 2019 box office levels.

Quiet Place II blew away analyst estimates and came close to matching pre-COVID expectations.

Let’s go to Deadline for all the news from Memorial Day Weekend:

Any major studio executive who is out to prove that the theatrical business doesn’t work can rip up that presentation they had planned for next week about projected streaming revenues. Because this weekend, the domestic box office finally came back, and no, it wasn’t with Tenet or a No. 1 movie that’s being released on streaming day-and-date with theatrical.

Paramount’s A Quiet Place Part II is crushing it, having grossed $19.3M on Friday, including $4.8M Thursday night previews. Saturday eased 22% to $15M. The studio’s Sunday came in lighter than expect, but no big deal, as the numbers this past weekend were fantastic.

A Quiet Place Part II grossed $13M yesterday, for a revised 3-day is now at $47.4M 3-day and $57M 4-day opening at 3,726 theaters for a $15,7K theater average. That’s a number which isn’t too far from the $60M which the John Krasinski-directed sequel was expected to do in its 3-day opening pre-pandemic!


Quiet Place II wound up right around where it was expected to be pre-pandemic. If all theaters were open, it probably would have beat pre-COVID expectations.

The other much hyped film from the weekend – Cruella – didn’t do half bad considering it was also released on Disney+, coming in at $21.3mm for the three day and likely $26.5 by Monday end (CNBC has this at $42.6 on the four day, I’ve found Deadline to be better source). When all is said and day, movies as a whole will do close to and maybe over $100mm for Memorial Day Weekend + Monday. Pretty impressive for an industry declared dead a few months ago.

Movie theaters are now de-risked if the risk everyone feared was a material decline in box office receipts in perpetuity. We’re right back at 2019 levels for new films people want to see, and the second half of 2021 is chock full of blockbusters, as is the first half of 2022.

Barring some crazy black swan, the news flow for the movie industry is going to be overwhelmingly positive for the rest of the year and into 2022. I think the success of movies still hasn’t gone mainstream, and it might take a few months before financial news realizes the “movies are dead” thesis was completely wrong. I hope we get to see CEOs of the movie chains do some victory lapping in interviews this week. Let’s give all of them a well deserved hat tip for weathering the storm and finally making it to the other side.

What does this mean for Stock Talking favorite National CineMedia (NCMI)? Well, to start things off, I’m still convinced this stock doesn’t really trade on headlines, as the price action has been erratic to say the least over the last year, and it traded to $6 before new films started to shine and it became obvious the vaccine effort was working in the US. Semi-strangely, its biggest days have been when AMC has popped on Wall Street Bets speculative money.

I like to say I follow businesses and not stocks. NCMI as a business still has to prove that booming movie attendance is flowing through to advertising revenues in the form of CPM dollars (cost companies pay them per 1K people who see the ads). Based on management’s commentary in earnings calls and one transcript from a conference they attended last week, it looks like we could see a pick up in business in 2H 2021 and even an FCF positive company by year end:

NCMI at JPM Global Technology Conference (May 2021)


As Tom mentioned, given the significant decline in TV ratings, we are very optimistic about our success in attracting meaningful levels of upfront commitments. Given this national booking outlook and a continual ramping up of our regional and local businesses, it is our expectation that by the end of Q3 2021, we will be at a monthly run rate of more than 50% of 2019 revenue levels required to achieve cash flow breakeven after debt service on an accrual basis.

And by the end of the year, we expect to be trending back towards 2019 revenue levels, assuming that theatrical schedule remains firm, COVID-19 cases further decline, allowing government restrictions to continue to decrease and an upfront that is consistent with our expectations. With every passing week, we should have a better understanding of theater attendance trends and our success in the scatter market and upcoming TV upfront. And we will provide an update to this general Q3 and Q4 business guidance during our second quarter earnings call.

NCMI Q1 2021 call

The company also noted in that conference that CPM rates (what a company pays them per 1K impressions) should do well as broadcast TV continues to decline and it becomes harder and harder to reach consumers. The movies remains one of the only captive audience formats – what other medium can you show people ads and guarantee they see them? Even the internet doesn’t have that because of ad blockers.

Once NCMI starts to produce cash, remember that it just pays it out to shareholders. Here’s the CEO from a recent conference on NCMI’s leverage and what it does with cash:

Fundamentally, it’s important to understand that NCM’s structure was really built to be a pass-through to its 4 owners. And historically, while we have paid back a modest amount of debt, particularly in ’18 and ’19, over time, our intention is really to distribute the majority of our free cash flow. So from a capital structure perspective, we feel comfortable with our leverage ratio around 4x, which was our historical pre-COVID level. And fully optimized leverage at 3.5 to 4x would be a sweet spot for us.

NCMI at JPM Global Technology Conference (May 2021)

NCMI has about $1bn in long-term debt per the latest Q – once they get a few normal quarters under their belt, it’s not unreasonable to think they could do $200mm+ in EBITDA (per their 10K, this is how they measure for leverage covenants). Remember that in March the company took on $50mm of additional debt to raise liquidity and get a waiver for a leverage covenant they were going to break. So what is true is before NCMI can raise their dividend, they likely are going to have to pay down the additional debt they took on to get back to a leverage level they’re comfortable with.

I think being conservative that it may take until the end of 2022 for NCMI to raise the dividend near pre-COVID levels. Remember though the market trades stocks ideally as the net present value of future cash flows, so if and when it becomes clear in earnings calls NCMI is delevering in preparation to raise the dividend, I expect the stock to do well.

What I’m trying to say here is the NCMI story has a few more quarters to play out. I firmly believe the stock should be re-rating now as movies have fully de-risked, but I get small caps are often ignored.

Risk-reward on NCMI remains excellent since the market still values it with low expectations. I feel confident we strong FCF in the next five years – potentially enough cash flow to equal the current market cap – and for that reason I’m very content holding. Some very basic math – I think this could be an ~$8+ stock at least based on $130mm of FCF and trading at a 15% FCF yield (3x the market, but this company doesn’t grow). I see a huge margin of safety at the current price, which gives NCMI a ~$400mm market cap which I am hugely confident they will earn back in cash in 5-7 years. That entire time, I get a 4% dividend assuming no change and I fully expect them to bump it by end of 2022.

I’ll also mention the implied volatility on NCMI options regularly trades about 60% (about 3x the market), so you can get great premiums selling out of the money calls. As an example, the Jun 18s currently go for 0.25 on the $5, so you can get a ~5% yield in one month (albeit giving up all upside over 5) at that price.