National CineMedia stock soars 16% as ‘lights-down’ ad strategy boosts earnings

National CineMedia Inc. shares soared more than 16% Friday, after the cinema advertising network operator topped earnings estimates for the fourth quarter and surprised investors with a dividend hike.

Centennial, Colorado-based National CineMedia NCMI, +16.00% posted net income of $19.1 million, or 24 cents a share, up from $16.3 million, or 21 cents a share, in the year-earlier period, topping the 21 cents FactSet consensus. Revenue rose 7.1% to $147.2 million ahead of the $140.0 million FactSet consensus.

The company’s board approved an increase in its quarterly cash dividend to 19 cents a share from 17 cents last quarter. The new dividend is payable March 17 to shareholders of record as of March 3. The new annual dividend rate implies a dividend yield of 9.50%, compared with the implied yield for the S&P 500SPX, -1.15% of 1.80%.

The company said it now expects 2020 revenue to be up 1.2% to 4.5%, or a range of $450 million to $465 million, up from $444.8 million in 2019.

Wedbush analyst Michael Pachter raised his price target to $10 from $9 and reiterated an outperform rating on the stock.

“We have confidence that NCM can expand its reach into the premium national ad market, and that the assumptions we have long held will ultimately come to pass,” Pachter wrote in a note to clients. “Specifically, we expect NCM to recoup ad dollars lost from the expansion of reserved seating, to drive growth in its regional business, and expand national ad revenue with its premium ad spots.”

The company’s premium ad strategy offers advertisers the opportunity to book slots during the first minutes of “lights down,” or the start of the showtime when the lights in a cinema are dimmed and more cinemagoers are in their seats. The premium the company can charge for those slots helped offset a 9% decline in attendance per screen in the quarter, said Pachter.

“Later in 2020, we also expect NCM to benefit as available inventory on TV and social media becomes scarce around the 2020 Olympics and upcoming presidential election,” said the analyst. ”We also expect local revenue growth as contracts increasingly contain digital components, and as ads are pulled forward later in the pre-show.”

B. Riley FBR raised its stock price target to $9.00 from $7.50 on the report and reiterated a neutral rating.

“Heading into 2020, we would expect continued demand/CPM (cost per thousand impressions) strength from the “lights down” inventory and expect more visibility into platinum spot potential as the 2020-2021 upfront gets under way,” analyst Eric Wold wrote in a note.

The dividend hike is a surprising move and vote of confidence in the new ad strategy, he added.

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Separately, cinema chain operator Cinemark Holdings Inc. CNK, -12.50% also raised its quarterly dividend by 2 cents to 36 cents a share. But the company’s fourth-quarter earnings fell short of estimates, with per-share earnings of 22 cents lagging behind the 43 cents consensus. Revenue fell to $788.8 million from $796.8 million, also below the FactSet consensus of $799 million. The new quarterly dividend of 36 cents will be paid March 20, to shareholders of record as of March 6, to imply a dividend yield of 4.41%.

Cinemark had 6,132 screens in total at year-end and is planning to open 13 new cinemas and 150 screens in 2020.

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Also in the sector, IMAX Corp. IMAX, -2.15% reported fourth-quarter earnings that beat Wall Street estimates. IMAX reported net income of $21.4 million, or 29 cents a share, in the quarter, compared with net income of $3.8 million, or 3 cents a share, in the year-ago fourth quarter. Revenue jumped 14% to $124.3 million from $109 million a year ago. Analysts surveyed by FactSet had expected net income of 28 cents a share on sales of $117.4 million.

IMAX said it hasn’t paid a dividend over the past two years, and currently has no plans to pay a dividend.

Cinemark shares were down 6%, and have fallen 17% in the last 12 months, while the S&P 500 SPX, -1.15% has gained 22%. IMAX shares were flat, but have fallen about 20% in the last 12 months.

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