Macquarie expects theater companies to report better margins

Macquarie notes that Q3 U.S. box office admission revenues were $2.66B, which was better-than-expected. The firm points out that Q3’s performance was driven by films such as “Deadpool & Wolverine,” “Despicable Me 4,” and “Twisters.” Given the strong box office results, Macquarie expects theater companies to report better margins year-over-year. Outperform-rated Imax (IMAX) remains its top pick, followed by Outperform-rated Cinemark (CNK). The firm says that given growth, operating leverage and technology moat, Imax shares can easily trade at over 20-times price-to-earnings. Further, Macquarie expects Cinemark to generate $205M in Q3 EBITDA. Given the recent equity raise, high interest and deferred rent, Macquarie remains bearish on Underperform-rated AMC Entertainment (AMC), although it thinks valuation is starting to look more reasonable given box office “hope.” Neutral-rated Reading International (RDI) remains a micro-cap theater/real estate story that has been crunched by declining industry trends, the firm notes, adding that it believes there is still hidden value if it can execute.