National CineMedia: 2024 Looks Like A Write-Off (NASDAQ:NCMI)

Andersen Ross/DigitalVision via Getty Images In February, I wrote a cautious update on National CineMedia, Inc. (NASDAQ:NCMI). Although the company was operating with a clean balance sheet after emerging from Chapter 11 bankruptcy in late 2023, National CineMedia’s business fundamentals were not robust, and I had doubts about whether the company can return to profitability in the near future. With the company recently reporting fiscal Q1/2024 results, I thought it would be timely to check in on the company, to see how its cinema advertising business is progressing in 2024. NCMI performed better than expected in the first quarter, with revenues and operating income both better than management’s prior guidance. However, the outlook for the rest of 2024 is for large double-digit declines, as the film slate looks especially weak. With 2024 being a write-off, investors considering NCMI may have to look forward to 2025’s film slate, when a few highly anticipated blockbusters are due to be released. However, if investors are betting on 2025’s film slate, they may find better value in the movie theater chains. I am maintaining my hold recommendation on NCMI for now. Brief Company Overview A quick refresher for those not familiar with the company, National CineMedia is the largest U.S. theater ad network. NCMI shows pre-show advertising (i.e., movie trailers) on over 18,000 screens and 1,400 theatres. Its advertising network includes leading national chains such as AMC, Cinemark, and Regal (Figure 1). Figure 1 – NCMI overview (NCMI investor presentation) The company ran into financial trouble in the last few years, primarily because of the COVID-19 pandemic, which caused moviegoers to stay home. This negatively affected NCMI’s ability to service its debts and ultimately forced the company into Chapter 11 bankruptcy. Although movie box-office sales have since recovered to ~80% of pre-pandemic levels in 2023, the actual number of tickets sold, which is the key driver of NCMI’s revenues, only recovered to 68% of pre-pandemic levels (Figure 2). Figure 2 – Domestic box-office and tickets sold (the-numbers.com) NCMI Q1/2024 Beating Guidance In the recently reported Q1/F24, NCMI recorded $37.4 million in revenues, a 7.2% YoY increase, but still suffered an operating loss of $22.7 million (Figure 3). Figure 3 – NCMI Q1/24 financial performance (company reports) Adjusted Operating Income Before Depreciation and Amortization (“Adj. OIBDA”), a key operating metric that NCMI uses to measure its financial performance, was -$5.7 million in the quarter (Figure 4). Figure 4 – NCMI Q1/24 Adj. OIBDA (NCMI investor presentation) However, on the bright side, NCMI did manage to beat its prior guidance of $35 million in revenues and -$7.0 million in OIBDA (Figure 5). Figure 5 – NCMI beat guidance (NCMI investor presentation) But Future Guidance Is The Issue While NCMI’s Q1/24 results were slightly better than the same period in 2023 and a beat to guidance, the company’s outlook for Q2 looks materially weaker than last year. For the upcoming quarter, NCMI is guiding to revenues of $49.5 – $51.5 million compared to $64.4 million in Q2/2023, or a decline of 21.6% YoY at the midpoint. Adjusted OIBDA is expected to come in at $3.5 – $4.5 million, vs. $12.5 million in Q2/23. Weak Film Slate To Blame For Poor Guidance The problem for National CineMedia and the movie theater chains, in general, is that movie attendance has fallen off a cliff. As we can see from Figure 2 above, 2024 box-office sales are currently tracking at 75% of 2023 levels and just 60% of pre-pandemic levels! Part of the reason for a weak 2024 box-office is that the 2023 Hollywood labour strikes delayed the production and release of many movies. Furthermore, as I noted in a recent article on The Marcus Corporation (MCS), the 2024 film slate has been lacking box-office hits like 2023’s Oppenheimer and The Barbie Movie. So far, the top-grossing domestic movie of 2024 is Dune: Part 2 at $282 million (Figure 6), far less than 2023’s top-grossing movie The Barbie Movie, which grossed $636 million (Figure 7). Figure 6 – Top grossing movies of 2024 (the-numbers.com) Figure 7 – Top grossing movies of 2023 (the-numbers.com) More importantly, 2024 has had many notable duds, including the much anticipated Furiosa: A Mad Max Saga, which grossed just $26 million in its opening weekend, a far cry from its predecessor, Mad Max: Fury Road, which debuted at $45 million in 2015, or roughly $61 million in 2024 dollars, adjusted for inflation. To add to the industry’s misery, the perennial blockbuster factory Disney/Marvel Studios is only releasing one movie in 2024, the highly anticipated Deadpool And Wolverine. Meanwhile, its competitor, Warner Brothers/DC, will be taking a hiatus in 2024 after rebooting their DC cinematic universe. So there could be a serious dearth of blockbuster movies in the 2024 slate. Consensus Estimates Now Expect A Loss In my February article, I noted that consensus estimates were quite hopeful about National CineMedia’s results and were looking for approximately breakeven performance for the company in 2024. However, after the poor box-office performance in recent months, analysts have now largely written off 2024, with consensus expecting NCMI to report a $0.12/share loss (Figure 8). Figure 8 – Consensus expects 2024 to be a write-off (tikr.com) Valuation Looks Expensive With 2024 a write-off, investors looking for valuation support may have to roll their expectations to 2025. Based on consensus estimates of $0.28/share in EPS for 2025, NCMI is currently trading at 17.5x 2025E Fwd P/E (Figure 9). Figure 9 – NCMI is trading at 17.5x 2025E EPS (Seeking Alpha) Compared to movie theater peers like Cinemark (CNK), NCMI’s valuation looks expensive, as CNK is only trading at 9.6x 2025E Fwd P/E (Figure 10). Figure 10 – NCMI vs. peer valuations (Seeking Alpha) Put another way, if analysts are correct and there is a rebound in 2025 box-office sales, investors can get a larger ‘bang-for-their-buck’ by buying CNK shares at 9.6x P/E vs. NCMI at 17.5x. Risks To National CineMedia In my opinion, the biggest short-term risk to National CineMedia is the film slate, which is something outside of the company’s control. If there are no ‘must-see’ films playing in theaters, then theater chains and ad networks like NCMI will suffer. A longer-term issue is whether there is a secular trend away from attending movies in theaters. As I have written previously, many households took advantage of the COVID-19 pandemic (and government stimulus cheques!) to upgrade their home theatre systems. With an upgraded home theatre system, non-blockbuster films can now be enjoyed in the comfort of one’s home without any major difference in picture or sound quality. Furthermore, the costs of going to the movies have risen dramatically. According to the U.S. Bureau of Labor Statistics, the price of admission to movie theaters has more than doubled since 1997, with inflation especially pronounced in the last few years (Figure 11). Figure 11 – Movie admission inflation (BLS from in2013dollars.com) Coupled with the exorbitant prices of concession items like popcorn and sodas, an outing to the movies can easily run over $100 for a family of four (from personal experience). Finally, many adolescents today have increasingly shorter attention spans, driven by the proliferation of short-form videos like TikTok videos and Instagram reels. 2-hour movies may seem like an eternity compared to the usual 30-seconds to 1-minute videos that these teenagers consume. Therefore, it is not hard to see why theater admission could be in a secular decline and will not surpass pre-pandemic levels for many years to come. Conclusion National CineMedia started 2024 with a better-than-guided first quarter, delivering $37 million in revenue and -$5.7 million in OIBDA. However, the company’s guidance suggests the rest of 2024 will be a down year compared to 2023. This is because the film slate for 2024 looks especially weak, with many blockbuster franchises like Marvel and DC deciding to reduce their output after recent missteps. For NCMI, 2024 looks like a write-off, as analysts widely expect the company to report a loss for the full year. Looking forward to 2025, if there is a box-office rebound, investors may be able to find better value in certain movie theater chains like Cinemark. In the long-run, I also worry about a secular decline in movie theater attendance. I am maintaining my hold rating for now as we await the arrival of 2025’s film slate.

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