Carmike Cinemas, Inc. (CKEC) faces a difficult operating environment, along with its own financial challenges. Although the company has had success with recent ticket price increases, the gains have not been sufficient to offset declining attendance. We do not expect material share price appreciation from current levels and are initiating coverage on shares with a Sell rating.
The Columbus, Georgia-based company's current balance sheet leaves it with little financial flexibility. The overwhelming majority of the company enterprise value is comprised of debt, and the management recently suspended the quarterly dividend to focus on reducing leverage. While we believe that this was a wise strategic move, the management must be diligent in ensuring that the company does not violate any existing debt covenants going forward.
In light of the negative economic outlook, we believe that the company has a limited margin for error in executing its operating strategy. Further, we currently project that Carmike will post declines in both EBITDA and Theatre Level Cash Flow in 2008, while once again generating net losses.
Our price target of $3 equates to an EBITDA multiple of approximately 6.5x our 2008 EBITDA estimate and approximately 5x our estimated 2008 Theatre Level Cash Flow. While these multiples represent discounts to Carmike's larger peers, we believe it is appropriate, given the company's business strategy and financial position.
Read the full analyst report on CKEC
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