A sell-off in Cinemark coupled with the success of the latest installment in the “Avatar” franchise makes now a great time for investors to snap up the stock, according to JPMorgan. JPMorgan upgraded Cinemark to overweight from neutral and kept its $15 price target, which implies a more than 57% upside from where the stock currently trades. Shares rose 2.5% in premarket trading on the news. “Following a 31% decline in shares since the beginning of December (vs. SPX -3%), we believe the risk/reward is more favorable to take a positive view on the stock,” wrote analyst David Karnovsky in a Thursday note. CNK 3M mountain Cinemark holdings chart showing 30% drop in December “The sell-off we note was largely driven by the performance of Avatar: The Way of Water, which released on Dec 16; while the opening weekend underperformed our expectation, the film has since demonstrated strong legs and is likely to end up in the top ten highest domestic grossing movies of all time,” he added. Box office boost This all bodes well for the movie theater chain going forward, even in the face of a potential recession in the U.S. “The upshot is that we think the market has drawn the wrong read-through to broader moviegoing, instead of seeing the sequel as another proof point for resilient demand, especially amid a softening economy,” Karnovsky said. JPMorgan also now has a greater degree of confidence in their 2023 North America box office forecast and sees a continued recovery in movie supply. Commitments from major streamers such as Amazon and price increases should help theaters grow in the long-term. “Meanwhile, commentary from major studios seems to have reached an inflection point over the past few months, with a pivot away from subscriber growth at all costs, to strategies that take advantage of more flexible distribution to maximize the value of films across theaters and DTC,” he said. More stability in this industry model should help benefit Cinemark and push its multiple back towards pre-pandemic levels, according to JPMorgan. Of course, there are still some risks on the horizon that could lead to near-term pressure on the shares, such as was seen with the recent sell-off. That includes underperformance of upcoming movie releases and risk stemming from Cinemark’s high financial leverage — though the latter should decline with growth and the company does not have material debt maturities until March 2025, JPMorgan said. But there’s upside from the box office outlook, which should grow 15% on the year and continue to add more films each year, especially as streamers and small and mid-tier studios look to fill up calendars. “Looking at 2024, while still early, we’re encouraged given visibility already into 25 films that can gross $100m-plus, and expect the number of wide releases overall to increase, though still run short of pre-pandemic levels,” said Karnovsky. — CNBC’s Michael Bloom contributed reporting.
