B Riley FBR's Concerns About National CineMedia Have Been Sufficiently De-Risked

National CineMedia, Inc. NCMI last week reported below-consensus fourth quarter results and announced a dividend cut.

The Analyst

With some of the risks B Riley FBR had anticipated playing out, analyst Eric Wold upgraded National CineMedia from Neutral Buy, maintaining the price target at $7, suggesting 22 percent upside from current levels.

The Thesis

With the 26 percent pullback in National CineMedia over the past two weeks, the 23 percent dividend cut and the expectations that tax reform will drive positive free cash flow in 2018/2019, as opposed to previous expectations of negative free cash flow, have sufficiently de-risked B Riley FBR's concerns, Wold said in a note.

Wold now sees the possibility of a potential strategic review or activist involvement, given shares are near the lowest level in the company's history and Standard General recently filing a 13-D seeking two Board seats and additional discussions with the company.

An acquisition could boost cash flow conversions, while the company could enhance a potential buyer's platform/offering, Wold said.

"With no change to our $7 PT, 22% upside from Friday's close, and a potential total return of 34% including the 12% dividend yield, we are upgrading NCMI from Neutral to Buy," the firm concluded.

The Price Action

National CineMedia shares are down about 55 percent over the past year, having ended Friday's session up 1.42 percent at $5.72.

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