Cinemark Holdings, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

A leading motion picture exhibitor, Cinemark operates movie theaters globally, showing a variety of films to its customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Cinemark Holdings, Inc. (CNK) is a major player in the global motion picture exhibition industry. They operate a large network of movie theaters across the U.S. and Latin America. Their business model is centered around providing entertainment experiences, primarily through the exhibition of films and related concessions. In 2023, the company generated a total revenue of $3,233 million, with an operating income of $569.5 million.

Revenue Distribution

Cinemark’s revenue streams can be broadly classified into two major categories:

  1. Admissions: This is the largest revenue generator, consisting of box office ticket sales. The revenue from this stream is primarily driven by the number of people attending movies, as well as the price of the tickets.
  2. Concessions: This segment includes sales of food and beverages at the theater. This is a high-margin part of the business that often accounts for a significant portion of total profits.

The company also generates revenues from screen advertising, other theater revenues, and various minor sources. The breakdown of revenue streams are generally: admissions (60%) and concessions (30%). In the recent past, and due to the rise of the digital business, we can find in their income statements revenues from digital advertising and alternative content.

  • Movie exhibition is a cyclical business
    • Attendance can fluctuate depending on the release schedule, and the overall quality of the films being offered. The COVID-19 pandemic significantly impacted the entire industry by causing theater closures and limiting movie production.
    • There has been a recovery from this shock in past years. 2023 was overall a good year for them, showing improvement from the COVID era.
*The company's revenue is heavily correlated with the number of blockbusters being released and the number of high-quality films. The lack of these might hurt profitability and demand while the oversupply may cause an opposite effect.
  • Streaming Services and Competition: The proliferation of streaming services presents a significant threat to movie theaters. Consumers now have a greater array of options for their entertainment dollars. This can influence theater attendance over time. However, there are strong signs that there is still a market for theatrical experiences and that both will coexist.
    • Studios are increasingly releasing movies in theaters then making them available on streaming platforms
  • Technological Developments: There has been a move towards a more digital-focused infrastructure as shown in their investments. Moreover, the industry is always on the lookout for technology that could attract new customers and/or improve experience. There is also a push for higher quality theatre equipment and experiences to continue to draw customers.

Competitive Landscape

  • Concentrated Industry: The movie exhibition industry has always been fragmented, however, it is consolidating and is dominated by a handful of large players such as AMC, Regal, and Cinemark. This means that market shares may change drastically and the importance of certain players may be amplified or diminish with these movements. Competition is more fierce at the local level, where smaller theaters provide alternatives, that tend to specialize in local taste.
  • Competitive Pricing: There’s always pressure on ticket prices from discount or budget movie chains. As such, price wars can ensue, which will drastically impact profits.
  • Alternative Entertainment: The movie exhibition industry is at constant battle to maintain market share and compete with other forms of entertainment, such as sports or concerts.

What Makes Cinemark Different?

  • Global Footprint: One of the distinctive features of Cinemark is its operation in both the US and Latin America. This broad geographical footprint allows the company to capture revenues from a wider variety of markets and provides a degree of stability. However, the currency fluctuations create volatility.
  • Digital Transformation: The company is investing heavily into digital systems, with emphasis on data analytics and customer engagement through digital platforms.
  • Their most recent earnings call they were emphasizing on their 3 pronged strategy focusing on technology (including mobile ordering, and marketing), food, and premium movie experiences.
  • High-Quality Experience: Cinemark focuses on offering an enhanced movie-viewing experience through comfortable seating, high-quality sound systems, and immersive screens, such as IMAX and XD. This can often result in higher prices compared to smaller or budget chains.
  • Loyalty Programs: Cinemark has a robust loyalty program that provides rewards, exclusive content, and other benefits to its frequent customers. This provides an additional layer of defensibility, as there are switching costs for users.

Financial Analysis

Revenue & Profitability

The company had a strong rebound in 2022, with high admissions and concessions sales and great profitability, and have seen a strong 2023, showing consistent positive results. However, these results have not matched the pre-pandemic years. They have a large recovery capacity as shown in the revenue and income jumps of the last two years, but also a risk from a change in consumer behavior. As a consequence of all the above, their profit margin is less attractive than it used to be pre-pandemic. For the nine months ended September 30, 2023, revenues reached $2.427B and net income was $223.7M which translates to 9.2% net profit margins. Their 12-month period ended in September 2023 had revenues of $3.233 billion and a net income of $305.5M with net profit margin of 9.4% as reported in the 10-K report.

Debt and Capital Structure

While overall debt levels are manageable, a large portion of it is due to lease obligations which should be looked at with caution. They have about $2B in long-term debt and lease obligations. Their current debt is low due to the cash balance, and most of it is due to operating leases. However, long-term debt is pretty high relative to their equity and EBITDA. This makes the company vulnerable to interest rate risk or inability to pay debts. Moreover, because of these high obligations, it makes the company less flexible.

Cash Flow

Although net income is improving, it’s still below pre-pandemic levels and cash flow is still below them. This will take time to correct, and it will likely require more blockbusters to come to the theatre. Nevertheless, the operating activities cash flows are positive and showing recovery after the pandemic impact. The free cash flow is more than enough to cover capital expenditures, but still slightly low to cover dividend payments.

Moat Assessment: 2/5

  • Brand: While Cinemark is a recognized brand, it doesn’t have the same strong brand power as other forms of entertainment. There is high competition in the industry, with similar options for the consumer. So it doesn’t create a strong competitive advantage on its own. (1)
  • Network Effect: This is non-existent for them since they don’t create a network of users, but merely a network of theaters. (1)
  • Switching Costs: Some customers might prefer to stay loyal to a particular chain for loyalty benefits. But those switching costs are not that high. If a competitor has a better film selection or a closer location, people are likely to switch. It doesn’t create significant pricing power. (2)
  • Economies of Scale: As the second-largest theater chain in the US, they benefit from certain scale advantages, including the ability to purchase supplies and film rights more cheaply. But this is not that meaningful and other bigger competitors have even more of that ability. (3)
  • Intangible Assets: They do not have specific patents, unique licenses, or any similar type of assets to make its revenue hard to reproduce. (1)
  • Distribution: The existing theaters and contracts with studios give them some advantage, as building more theaters can be costly for new entrants. But the existing theaters can also be easily substituted. (3)

Overall, Cinemark has some weak competitive advantages that might give them pricing power in certain niches or certain areas, but overall, do not create a substantial barrier against competition. Their business is heavily dependent on the quality of movies being shown, not some fundamental characteristics of their business.

Risks to the Moat and Business Resilience

  • Streaming Services: The increasing popularity of streaming services is the biggest threat to their business. As streaming platforms improve in content, they could steal demand away from movie theaters. However, they will co-exist and both will make money, with less impact in Cinemark.

While they can’t avoid the technological developments, it is essential to monitor and understand how they adapt to the changes in technology and the ways new forms of media distribution will impact demand.

  • Economic Downturns: A recession will likely cause a downturn in demand as discretionary spending is often reduced in times of economic uncertainty. However, a bad economy could also push people towards more low-cost entertainment like movie theaters.
  • High Debt: Their current high debt and lease obligations make them susceptible to higher interest rates and less flexibility in expansion. As such, it also puts a drag on future profits that would otherwise be put into business development.
  • Major Global Crises : Another event that threatens movie theaters is, of course, future pandemics or crises. In those cases, the company will probably shut down, hurting the income and creating a lot of uncertainty about its future viability.
  • Poor Film Releases : The quality of films is an important risk, and is out of the company’s control. If blockbusters and anticipated hits turn into mediocre or bad films, the company will not meet the revenue targets.
  • Competition: The threat of a new low-cost player or more competition can greatly harm the company’s profitability and reduce its ability to command higher premiums.

Overall, the company is reliant on external conditions that it doesn’t control, making it susceptible to market downturns or shifts in consumer behavior.

Understandability: 2/5

Their business is relatively simple, they have theaters and show movies for revenue. Yet there are nuances that might make it a bit complicated, as their dependence on specific movies or external circumstances creates many layers of complexity, along with some financial nuances due to leases.

Balance Sheet Health: 3 / 5

As we mentioned before, there are some concerns about the company’s debt. While their financial statements show improvement, it is important to closely follow the company’s progress and see if their cash flows can sustain long-term debt and lease repayments. If they achieve that, and profitability grows consistently, then the balance sheet health is going to increase significantly in the coming years.

Recent Concerns

  • Box office dependence: Even after the rebound in recent years, the company is still heavily reliant on a few big films that drive the majority of their revenue. A lack of big hits can drastically hurt revenue and earnings. This is confirmed in their own quarterly press releases.
  • Advertising woes: The company is still suffering from weakness in advertisement revenues. A decline in brand advertising has an adverse impact on overall profitability.

Management continues to state that they are focused on maximizing shareholder returns and value by growing their operating metrics, strengthening their balance sheet, controlling costs, and having a “robust” portfolio for future growth. They recognize the impact of their company on society, and claim they are committed to making movie-going accessible and fun for the masses.