National Cinemedia: Network Effect and Rising CPM's Point to Upside

A San Francisco presenter recommended National Cinemedia (NASDAQ: NCMI, $16.36) as a Buy. The company runs a nationwide cinema advertising network and has the leading market share in a rational duopoly with privately-held Screenvision. NCMI has 27-year exclusive contracts with the three largest movie chains in North America, which have founded the company and retain a combined 52% share in it, and the dominant presence in the metropolitan areas with the best demographics. CPM's in movie advertising are currently double the prime time TV rates due to much higher recall rates for movie ads and better targeting capabilities, but will move higher as the domestic industry matures. As National Cinemedia adds more independent operators coupled with consolidation by the three chains, the network effect will continue to strengthen, bringing in more and more advertisers. The company is sacrificing short-term growth in CPM's by going after large CPG accounts, but in the long-term higher utilization will more than make up for it. The presenter's target is $30 by 2014, or almost a double from where the stock is trading now.