For all the Barron’s 2018 Roundtable articles and notes click here.
Cinemark Holdings (CNK) $34.82 ($34.17 when published)
- It’s the third-largest movie exhibitor in the U.S. Cinemark controls 4,500 screens in the U.S. and operates 190 theaters in Latin America.
- After posting record box-office results in 2015, 2016, and the first quarter of 2017, the studios released a string of terrible movies this past summer.
- Box-office receipts declined 4% in the second quarter of 2017 and plunged by 15% in the third. It was the worst summer box office in 17 years.
- Wall Street analysts were quick to blame Netflix [NFLX], Amazon.com [AMZN], videogames, high ticket prices, and millennials.
- They declared that the industry was in “secular decline,” and identified the final death blows lurking in the form of premium video on demand and the money-losing subscription service MoviePass. As a consequence Cinemark’s stock declined 25% from its peak.
- Believe these fears are overblown. Expect the industry to recover.
- Despite recent headlines to the contrary, the domestic movie business remains healthy. Over the past 30 years, the domestic box office has grown at a compounded annual rate of 4%. Last year, it was down just 2%. Attendance has been a headwind, with ticket sales falling by 1% annually over the past 10 years.
- Cinemark has continued to grow revenue at a 6% compounded annual rate.
- Managed higher revenues through higher ticket prices and concessions per patron, and modest screen growth.
- Cinemark has invested in its businesses, adding digital projectors, 3-D, large-format screens, leather recliner seating, improved food choices, and alcohol.
- Cinemark trades at just over seven times enterprise value to 2018 EBITDA, versus its peak multiple of 10 times EV/Ebitda and a longtime average of eight times. Anticipating a box-office rebound in 2018 and 2019, I see 60% upside for the shares, plus a 3% dividend yield while you wait.
- Last month, competitor Regal Entertainment Group [RGC] agreed to buy United Kingdom–based Cineworld Group [CINE.UK] for 9.5 times EV/Ebitda, representing a 40% premium to Regal’s pre-deal trading price.
O’Reilly Automotive (ORLY) $270.45 ($260 when published)
- The third-largest retailer of aftermarket auto parts in the U.S. It operates close to 5,000 stores that serve both retail and commercial customers in 47 states.
- In 2017, the company reported disappointing same-store sales. That, coupled with reports of Amazon’s aggressive entry into the market, sent O’Reilly’s stock down in the first half of the year.
- The stock has recovered, and has been trading at $260. I believe there is still 30% to 40% upside
- O’Reilly has been a superbly run company in a growing segment. The O’Reilly family started the company in 1957, and David O’Reilly remains chairman. He has built a culture where the focus on the customer is the priority.
- Prior to 2017, O’Reilly averaged 5% same-store sales growth and 22% earnings-per-share growth over 10 years.
- It improved its operating profit margin to more than 20% and now generates a return on invested capital of almost 30%.
- The company used the cash flow it generated during that period to continue to open stores, make some acquisitions, and buy back shares. It has reduced its share count by close to 40% since 2010.
- Last year was difficult for the industry, and O’Reilly wasn’t immune. It has guided for a 1% to 2% decline in same-store sales with only 11% growth in earnings per share.
- About 40% of auto-parts sales are to mechanics and body shops. Speedy delivery is key.
- A large retail footprint, coupled with an elaborate hub and distribution presence, positions companies such as O’Reilly for the industry’s quick delivery demands and makes it harder for Amazon to penetrate this market.
- And, most parts sold are of a highly technical nature.
- The business will rebound in 2018 and beyond as cyclical factors help. Also, O’Reilly is a major beneficiary of corporate tax reform.
- The company will generate more than $20 a share in earnings by 2020. Applying a multiple of 17.5, the stock could be worth $350 a share by the end of next year.
CommScope Holding (COMM) $38.74 ($38.10 when published)
- A provider of telecommunications infrastructure
- CommScope remains well-positioned for telecom spending growth, despite its notoriously lumpy end markets.
- CommScope’s wireless business will snap back in 2018. AT&T is beginning to build FirstNet, a national network. Additionally, the company could benefit from increased spending by Sprint, following the abandonment of its planned merger with T-Mobile US.
- Expect renewed growth in CommScope’s fiber business as AT&T connects to the 12.5 million homes mandated by regulators in relation to its acquisition of DirecTV.
- CommScope could generate more than $4 a share of free cash flow in 2020. At 15 times free cash, the stock, now $38, could have 60% upside.
- As the company continues to delever, there is optionality from the potential future mergers and acquisitions, where management has a very successful track record.
Evertec (EVTC) $15.60 ($14.35 when published). 100% upside in 3 years.
- It is the dominant transaction-processing company in Puerto Rico.
- Hurricane Maria was the strongest storm to hit the island in 85 years. It left much of Puerto Rico without power. Evertec’s business has been negatively impacted, as many customers were unable to use credit or debit cards after the storm.
- Amid the uncertainty, Evertec’s shares have traded down almost 30%
- Still optimistic about the long-term outlook.
- Half of the company’s revenue is generated from bank processing and IT services, which weren’t significantly impacted by the storm. As of October, credit- and debit-processing services were back to 70% of pre-storm levels.
- Regardless, Evertec should continue to benefit from increased penetration of electronic payments, as management pursues an acquisition strategy across the region. At the end of the day, Evertec remains a highly resilient business, with a dominant share in a critical service.
- The stock, trading at a modest nine times cash flow, or $14 a share, is comparable to companies that command more than 20 times cash flow. See 100% upside in three years.
ANI Pharmaceuticals (ANIP) $70.87 ($69.41)
- Is a specialty generic and branded pharmaceutical company.
- It was trading in 2013 at $6 a share. It is now at $70, when shares of many other generic-drug companies have all but collapsed.
- The stock trades for about eight times enterprise value to Ebitda, whereas other generic-drug companies have been acquired for 12 to 15 times Ebitda. This company potentially could become an acquisition candidate.
- In a year or two, ANI will launch a corticotropin product that competes in a $1.2 billion market. The company has said the product could yield $200 million of Ebitda.
Article by Brian Langis