This year's rally in Cineworld (CINE) is fully understandable when looking at today's interim results. The UK and Irish cinema operator has grown admissions by 5.7%, increased its revenue per customer by 4.8% and increased its market share, now commanding 27.7% of all domestic cinema takings. Shares has been a long-term fan of the stock and our bullish stance remains intact, despite some tough comparative numbers to beat later this year.
The group has reported a 24.1% rise in pre-tax profit to £16.5 million. Net debt has come down 21.5% to £120.5 million; and the dividend's gone up 7.9% to 4.1p per share at the half-year mark. These are great results but not strong enough to warrant new earnings upgrades from the analyst community, hence why the shares dip 0.8% to 391.5p.
We don't see any reason to be worried by such a share price reaction. Stocks often rally ahead of results and then publication of the numbers tends to be the trigger for many people to lock in profits. Investors with longer-term horizons use such dips to top up their holdings; and that's exactly what we expect to happen with Cineworld.
The solid half-year results are interesting when you consider that market commentators are declaring 2013 to be the year of the blockbuster flops. There's a long list of high-budget films that have failed to lure in the punters including After Earth and Lone Ranger (the latter has only just opened in the UK, but there's low box office expectations following a disastrous run in the US). Yet the flipside is that there's plenty of films that have done well including Fast & Furious 6, Despicable Me 2 and Iron Man 3. Hollywood is expected to have its biggest ever summer box office in the US which bodes well for a similar strong turn in the UK.
Cineworld's third quarter benefits from having weak comparative numbers thanks to last year's Olympics distracting filmgoers. Yet the fourth quarter will be tough, perhaps impossible, to beat because last year's numbers were fueled by the James Bond film, Skyfall, which ended up the highest grossing film of all time at the UK box office.
The importance of putting a customer's needs first is clearly laid out in the Cineworld story. Its decision to drop booking fees and give a discount on tickets purchased via the internet has worked wonders, with online transactions now accounting for 20.5% of sales versus 13% a year ago. Its monthly membership card scheme (where filmgoers pay a fee to see as many films as they like) has seen a 10% rise in subscribers during the first half of 2013.
Canaccord Genuity analyst Wayne Brown lifts his price target for the stock from 360p to 450p. That's his third upgrade since November 2012. He comments: 'A strong H1, leading indicators pointing in the right direction and a strong film slate suggest a high degree of confidence in forecasts. The shares have been strong performers but if one takes a longer term view there remains meaningful upside.'
The shares trade on 17.2 times forecast earnings for 2013, with the price to earnings (PE) ratio dropping to 16.1 for 2014. That doesn't look demanding given its strong earnings growth track record. Expectations by analysts of a dividend around the 13p per share mark for 2013 equate to a prospective 3.3% dividend yield, which means that investors are being rewarded with decent levels of both capital appreciation and income.