By Sam Boughedda
Cinemark Holdings (NYSE:CNK) shares surged almost 9% Tuesday after they were upgraded to Overweight from Equal-Weight by a Morgan Stanley analyst.
The analyst, who maintained the firm's price target of $22 on Cinemark, listed three key reasons they upgraded the stock while stating consumers and studios are returning to theaters, a trend not reflected in CNK shares.
"Movie-going has also proven counter-cyclical as a form of inexpensive entertainment, insulating CNK from a slowing economy. See 30%+ upside in our base case, over a double in the bull case,” said the analyst.
Outlining the primary motivations for the upgrade, Swinburne stated they expect the North American box office can grow to 85% of its 2019 levels in 2023, Cinemark can maintain a 14% market share and the fact that their $22 price target assumes shares trade at 7x, which is at the low end of their historical EV/EBITDA range.
"In contrast to the slowing growth expected across most of our coverage group in '23, we expect Cinemark to grow EBITDA ~50% YoY as the film business continues its recovery. Our bull case reflects a full box office recovery by '23, allowing Cinemark to de-leverage faster and trade at 7.5x times EV/EBITDA, or ~115% upside to $36. Note shares traded $35-40 pre-pandemic," wrote the analyst. "Consumers are returning to theaters: Beginning in late '21, the N. American box office has been trending steadily upward as consumers have become more comfortable with going to theaters.”
The analyst pointed out that the movie business is “largely driven by ~65% of the population. Just 11% of the population are 'frequent movie-goers,' in aggregate driving roughly half of historical ticket sales.”