Buried within the seemingly ordinary transcript of National CineMedia's (NCMI) Q4 2023 earnings call lies a potential blockbuster revelation that Wall Street seems to have overlooked. While analysts have focused on the company's strong balance sheet and the impact of industry strikes on the film slate, a closer look at their newly announced share repurchase program and its potential impact on earnings per share reveals a hidden gem with the potential for explosive growth.

NCMI's Board has approved a new share repurchase program authorizing the company to buy back up to $100 million of its common stock over the next three years. On the surface, this might seem like a standard move for a company with a strong financial position. But when you consider the timing, the potential impact on earnings per share, and the likely trajectory of the film industry, this buyback could be the catalyst that sends NCMI's stock soaring.

Let's start with the timing. NCMI is currently trading at a significant discount to its intrinsic value, a fact acknowledged by management on the earnings call. While the broader advertising market has been facing headwinds, NCMI has shown remarkable resilience, posting record revenue per attendee in Q4 2023. This combination of a depressed stock price and strong underlying fundamentals creates a perfect opportunity for a share buyback to create significant shareholder value.

Now, consider the potential impact on earnings per share. NCMI's unlevered free cash flow in 2023 was approximately $23 million. With a commitment to reduce operating expenses by over $10 million annually, coupled with the anticipated rebound in the box office in 2025, it's reasonable to project free cash flow exceeding $35 million in the next two years. If NCMI dedicates just half of this free cash flow to share repurchases, it could buy back approximately 10 million shares annually at the current stock price.

Share Repurchase Program Impact

Here's where things get interesting. NCMI currently has approximately 97 million shares outstanding. Buying back 10 million shares annually for three years would reduce the share count by over 30%. This dramatic reduction in shares outstanding would have a substantial impact on earnings per share. Even if earnings remain flat, the decrease in the denominator of the earnings per share calculation would lead to a significant increase in the reported EPS, potentially attracting more investors and driving up the stock price.

Furthermore, NCMI's buyback program is not a one-time event. The authorization runs through 2027, allowing the company to continue repurchasing shares opportunistically as the film industry recovers and its financial position strengthens. This ongoing buyback program provides a built-in mechanism for sustained EPS growth, even if the pace of revenue growth is moderate.

Projected Free Cash Flow and Buyback Potential

The potential impact of this buyback program is even more compelling when you consider the anticipated recovery of the film industry. While 2024 is expected to be a softer year due to the delayed release of major films, 2025 is shaping up to be a blockbuster year, with a lineup of highly anticipated sequels and original films. This anticipated surge in box office revenue will further boost NCMI's free cash flow, fueling even more aggressive share repurchases and accelerating EPS growth.

The share repurchase program is a powerful signal of management's confidence in NCMI's long-term prospects. By returning capital to shareholders through buybacks, management is essentially putting its money where its mouth is, demonstrating a strong belief that the company's stock is undervalued and poised for significant growth.

What's even more intriguing is that NCMI's dominant position in the cinema advertising market gives it a unique advantage in a rapidly evolving media landscape. While traditional TV viewership is declining, cinema advertising offers a captive audience of young, diverse consumers who are highly engaged with the content. This captive audience translates into higher attention levels and greater ad recall, making cinema advertising an increasingly attractive option for advertisers seeking to reach these valuable demographics.

"Fun Fact: NCMI's cinema advertising network reaches over 700 million moviegoers annually, more than double the viewership of the Super Bowl! Source: https://www.ncm.com/"

Wall Street may be focused on the short-term impact of industry strikes, but the long-term story for NCMI is one of resilience, innovation, and a commitment to shareholder value. The share repurchase program is a powerful catalyst for growth, with the potential to transform this hidden gem into a box office smash. Investors who recognize this opportunity early on could reap significant rewards in the coming years.