Risky Reliance On Blockbusters And Franchise Titles Threatens Sustainable Growth

Key Takeaways

• Reliance on blockbuster hits for box office success is risky as audience preferences change and streaming competition rises.
  
• Expansion into programmatic advertising introduces uncertainty in maintaining advertising revenue per attendee amidst scaling efforts.
  
• NCM's innovative advertising solutions and data-driven approach aim to attract key demographics and advertisers, potentially boosting revenue through enhanced ad spend and client base expansion.

Catalysts

Through its subsidiary, National CineMedia, LLC, operates cinema advertising network in North America.

• The reliance on blockbuster hits and franchise titles to drive box office success might not be sustainable long-term, risking future revenue growth as audience preferences diversify and competition from streaming services increases.
  
• The forward-looking strategy to expand programmatic and self-serve advertising solutions, while innovative, introduces uncertainty around the ability to maintain or grow advertising revenue per attendee as these platforms scale.
  
• Despite a focus on enhancing inventory utilization and the introduction of new advertising categories, there's an inherent risk in the execution of these strategies which could impact future revenue, especially in a challenging macroeconomic environment.
  
• The high percentage of revenue coming from national advertising commitments might limit flexibility in response to rapid changes in the advertising market, potentially affecting earnings if advertisers reduce budgets.
  
• The continued investment in and reliance on NCMx and its advanced measurement capabilities to drive sales could be jeopardized by shifts in adtech, privacy regulations, or a failure to demonstrate incremental value to advertisers, impacting future net margins.

Assumptions

• Analysts are assuming National CineMedia's revenue will grow by 17.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 78.0% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $14.3 million (and earnings per share of $0.4) by about October 2027, down from $162.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2027 earnings, up from 4.2x today. This future PE is greater than the current PE for the US Media industry at 13.6x.
• Analysts expect the number of shares outstanding to decline by 28.08% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.17%, as per the Simply Wall St company report.

Risks

• The cinema industry saw significant momentum with highly anticipated theatrical releases, which may continue to increase consumer demand for moviegoing, positively impacting revenue and earnings through strong box office sales.
  
• NCM's success in attracting key demographics, especially Gen Z and millennials who represent 70% of their viewership, could maintain high advertiser demand and spending, bolstering advertising revenue.
  
• The introduction of new advertising formats and partnerships, such as the first-ever holographic activation and the increase in courtesy advertising revenue by 88% year-over-year, showcases innovative advertising solutions that could attract more clients and increase advertising revenue.
  
• The use of NCM's proprietary data platform, NCMx, to demonstrate measurable advertising outcomes, like the 27% lift in foot traffic for a QSR brand, could enhance NCM's value proposition to advertisers, potentially increasing ad spend and impacting revenue positively.
  
• The expansion into programmatic advertising and the launch of a fully automated self-serve platform for cinema advertising indicate NCM's efforts to capture new advertising budgets and clients, which could lead to an expanded client base and increased revenue streams.

Valuation

• The analysts have a consensus price target of $7.5 for National CineMedia based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.5, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $333.1 million, earnings will come to $14.3 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 6.2%.
• Given the current share price of $7.17, the analyst's price target of $7.5 is 4.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.