2014 has proven to be a very different experience for investors in Village Roadshow Ltd (ASX: VRL) and Amalgamated Holdings Limited (ASX: AHD). That's because, while the former has seen its share price fall by 1% since the turn of the year, the latter has made gains of 20% year-to-date. However, the future is of greater importance than the past, so with this in mind, which of the two cinema chains should you buy?
Valuation
When it comes to which stock is the better value, there is very little to choose between them. Indeed, both Village Roadshow and Amalgamated Holdings may at first glance appear to be overpriced. That's because Village Roadshow trades on a P/E of 20.6, while Amalgamated Holdings has a P/E that is only slightly lower at 20.2. Neither rating looks cheap when you consider that the ASX trades on a P/E of 16.2.
Growth potential
However, where the two companies' ratings start to make sense is when growth expectations are taken into account. Indeed, they're both forecast to increase their bottom lines at rapid rates, with Village Roadshow's earnings set to increase at an annualised rate of 15.8% over the next two years. Amalgamated Holdings' annual growth rate in EPS of 16% over the same time period is also attractive. Taking these growth rates into account means that the two companies trade on price to earnings growth (PEG) ratios of 1.3 (Village Roadshow) and 1.26 (Amalgamated Holdings), both of which are well below the ASX's PEG ratio of 1.86.
Income prospects
Where Amalgamated Holdings looks set to be the clear winner going forward is in terms of income potential. While both companies' fully franked yields are roughly the same right now at 4.1% (Village Roadshow) and 4.2% (Amalgamated Holdings), Village Roadshow is expected to reduce dividends by 19.7% per annum over the next two years. The reason for this is that dividends currently exceed profit (dividends are currently 1.58 times profit) and so the company needs to shift to a more sustainable footing. In contrast, Amalgamated Holdings looks set to improve its returns to shareholders over the next two years, with dividends per share due to increase by 7.2% per annum during the next two years.
Looking ahead
Although both companies offer strong growth prospects and attractive valuations (when growth is taken into account), the greater potential that Amalgamated Holdings offers when it comes to dividend growth makes it the preferable option. Certainly, Village Roadshow could deliver much better share price growth moving forward than it has done in the past, but Amalgamated Holdings' total return is more likely to be higher than that of its sector peer as a result of its better income potential.
