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Bear of the Day: Cinemark (CNK)

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A healthy consumer economy should breed plenty of great opportunities to invest in companies which serve consumers, especially in the discretionary and leisure markets. That has been the case over the past few years, but we have had some underperforming stragglers, too. One such example is Cinemark Holdings (CNK - Free Report) .

Cinemark is a major movie theater owner and operator, sporting a portfolio of more than 500 locations and nearly 6,000 screens. It is one of the largest movie theater companies in the world and holds a strong share of the U.S. and Latin American markets.

We are nearing the end of summer blockbuster season, and all in all, it has been a decent stretch for Hollywood. After summer revenue hit its lowest level in two decades last year, movies bounced back with year-over-year sales box office growth of nearly 13%.

A nice mix of superhero movies, the resurgence of documentaries, and films which featured unprecedented on-screen representation resonated with audiences, and the industry comfortably recovered from what has a horrible last year.

And that’s what makes Cinemark’s recent performance concerning. Just a few weeks ago, the company posted quarterly earnings of 70 cents per share, missing the Zacks Consensus Estimate of 75 cents. That figure was still a noticeable improvement from the year-ago period, but with revenue also coming in below expectations, we were left to wonder why Cinemark was unable to capitalize on improve box office numbers.

The summer movie season crosses into two fiscal periods for most movie theater companies, but if recent earnings estimates and revisions are any indication, Cinemark could be ready to disappoint in its next earnings release as well:

The Zacks Rank is fundamentally based on these estimates and revisions, so this negative trend explains Cinemark’s Zacks Rank #5 (Strong Sell) designation.

On top of that, there is not a particularly great earnings growth outlook for Cinemark right now. The company is expected to see its earnings contract nearly 12% on a year-over-year basis in the current fiscal year, and although the bottom-line is projected to rebound with growth of 11.5%, Cinemark would just be right back to where it was last year—a historically bad year for movies.

Cinemark has an interesting loyalty/subscription service that diehard fans like, but it does not seem to be doing much to spark revenue growth. Full-year sales are only expected to improve by 4.6% in 2018 and 3.8% in 2019. Plus, at nearly 19x forward earnings, CNK is hardly a massive discount.

To make matters worse, it looks like we might see continued headline volatility in the movie theater industry as Amazon (AMZN - Free Report) and Netflix (NFLX - Free Report) have reportedly express interest in acquiring Landmark Theaters, an up-and-coming U.S. theater chain owned by billionaires Mark Cuban and Todd Wagner.

Amazon has emerged as the likelier of the two to actually land the deal, and although Landmark is much smaller than Cinemark and is targeted at slightly different audiences, it speaks to a larger problem for brick-and-mortar chains. If tech companies can start disrupting the status quo of movie distribution and live viewing, that could be an issue for traditional chains like Cinemark.

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