Street Talk Alison Sachs, An Analyst At Lehman Bros., Explains Why The Investment Bank Began Its...

"We are a little concerned about trends in the industry over the next two years, including capital expenditures for screen building, the expense of getting out of leases for old theaters and profit cannibalization created as new megaplexes cause older theaters to lose money. These are issues in the industry that will lead to inconsistent EBITDA (earnings before interest, taxes, depreciation and amortization, or cash flow) as major exhibitors rebuild their circuits.

"The industry is a great business overall, with attendance and boxoffice sales both up. Yet we are more cautious because these factors are clouded by theater closings and rebuildings.

"In most of these companies' markets, one of the attractions of megaplexes is their operating efficiencies. They attract more people because they have a lot of options, and most people don't mind paying a slight price increase if they know they are going into great facilities.

"AMC is going to be a great circuit in the near future. They are ahead of the competition in terms of theater rebuilding. But they spend a lot of money to build, usually $1 million a screen, compared with Carmike, which spends $650,000, and Regal Cinemas, which spends even less. Plus, they are closing 400 screens over the next 18 months. There simply is a lot of confusion going on right now in terms of earnings and EBITDA.

"Carmike is in much smaller markets, and they have a lot of very old theaters with an average of five screens; AMC is close to 10. They, too, are rebuilding megaplexes and are going into markets that are more densely populated. But they are entering a period in which they will see a lot of competition they have not seen before as smaller, regional theater operators expand."

-- Jay Sherman