Summer often means going to the movies to see the blockbusters. But before the movies and the trailers come the advertisements. You know, the ones sponsored by Sprint telling you to turn off your phone, or the ads telling you how much better the movie would be if only you had a Coca Cola?
Movie advertising has grown into big business and there's a way to capitalize on it by investing in a company called National CineMedia, trading under the ticker NCMI. First it was a part of the three largest U.S. movie theater companies, Regal, Cinemark and AMC; then NCMI was spun off in 2005.
NCMI has two businesses. The first is movie advertising, which accounts for about 90 percent of revenues. The second is Fathom Events, which accounts for about 10 percent of revenues. National CineMedia solicits companies to advertise, helps produce the advertisements and owns the network to broadcast the advertisements.
The company has many attributes that make it an attractive investment. First of all, National CineMedia operates in a duopoly, an industry where there are only two main corporations. The only competitor is Screenvision, but it is a smaller firm and NCMI has upwards of 70 percent of the theater advertising market. Shamrock, a private equity firm, acquired control of Screenvision, whereas NCMI management has not changed.
In addition to the duopolistic structure, the industry has high barriers to entry. NCMI, as the progeny of the three largest movie theater companies, has entrenched relationships with them. In addition, its premier delivery platform is difficult to replicate; NCMI owns the base of satellites which disseminate the advertisements. The satellites allow efficient distribution and a high level of customization of which advertisements are showed at particular theaters. With the majority of these fixed costs of the network already paid for, the 12 percent compounded annual growth rate in revenue has contributed significantly to NCMI's bottom line.
National CineMedia also enjoys extremely favorable supply and demand economics. Movie advertisements only run for 22 minutes and offer about six unique advertisement slots. National companies such as Old Spice, Kraft, Google, Jeep, Taco Bell and Lowes, in addition to many local and regional companies, advertise on screen. What happens to revenue when more companies want to advertise - increased demand - with a fixed supply of 22 minutes? Profits for NCMI and its shareholders go up.
Furthermore, the increase in demand will continue because companies like to advertise in theaters. There are many reasons for this. For example, people are more attentive and focused in a theater. Compare this experience to ads on television which people can mute, or Internet ads, such as those on YouTube, where people can skip to a video without advertisements. Because moviegoers are seated and staring at the screen with limited distractions, NCMI can charge a premium for ads. The numbers don't lie. According to The Cinema Advertising Council, 2002 saw $185,800,000 in movie theater advertising revenue, while in 2010, that number jumped to $658,255,000.
NCMI is a very high-margin business, even compared to its advertising peers such as Lamar or Clear Channel Outdoor. The operating margins on this company are 44.58 percent - just to name one metric.
Future growth will come from NCMI's Fathom Events business, increased advertising demand and 3D advertising. Fathom is NCMI's arm which broadcasts HD performances, mostly concerts, in theaters. For example, there is the partnership with the Metropolitan Opera in New York which allows NCMI to broadcast live operas. Demand is expected to increase and NCMI is planning on broadcasting more performances in theaters. Also, there is more room for penetration. In the top 25 Designated Marketing Areas NCMI had 70 percent of theater advertising and in all DMAs it had 62 percent of advertising. Finally, with more 3D movies will come 3D advertisements. Because of the unique nature of these ads, NCMI charges a premium, making these ads very profitable.
Overall, National CineMedia shares are currently positioned for growth at a fair price and make for a good investment.
Harrison's column ran biweekly Wednesdays. He can be reached at h.freund@cavalierdaily.com.
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