Skip to main content

In action movies, the hero always escapes from perilous situations.

Can Cineplex Inc.’s struggling stock do the same?

In the past year, shares of Canada’s largest movie theatre chain have plunged about 40 per cent, hurt by falling box-office results, worries about the threat from streaming services such as Netflix and skepticism about the company’s diversification strategy.

Story continues below advertisement

Bags of popcorn are laid out on display during Cineplex Inc.’s annual general meeting in Toronto in May, 2017.The theatre’s latest reporting has done little to assuage investor concerns, as cinema attendance fell 9.3 per cent in the first quarter.

Nathan Denette/The Canadian Press

Cineplex’s latest results, released in May, did little to assuage investors’ concerns. In the first quarter, attendance fell 9.3 per cent to 17.8 million, with one movie – Black Panther – accounting for more than one-fifth of the total ticket sales.

Yet some analysts say Cineplex’s stock (CGX-T) is getting unduly punished for what may turn out to be a temporary lull at the box office. Not only does the company stand to benefit from a strong slate of movies in the second and third quarters – including the blockbuster Avengers: Infinity War and summer releases such as Incredibles 2 and Ant-Man and the Wasp − but the expected uptick in attendance comes at a time when Cineplex’s diversification and cost-saving initiatives are also starting to bear fruit.

“While the [first-quarter] headline performance was disappointing it does not represent a further acceleration of secular attendance decline,” Raymond James analyst Kenric Tyghe said in a note in which he maintained an “outperform” rating on the shares.

Mr. Tyghe isn’t the only analyst who sees opportunity in Cineplex’s beaten-down shares. According to Thomson Reuters, there are eight buy ratings, three holds and no sells, and the average price target is $35.55. The shares closed Tuesday at $30.72.

There are no guarantees the stock will reach analysts’ targets, of course, but even if the shares were to flatline for the next year investors would still pick up about 5.7 per cent from the dividend yield alone. Indeed, on the same day that Cineplex announced first-quarter results the company raised its monthly dividend by 3.6 per cent to $1.74 a share on an annualized basis − suggesting that management is looking beyond the current soft patch and sees better days ahead.

While box-office and concession sales still account for about three-quarters of its revenue, Cineplex has been trying to reduce its dependence on movies by transforming itself into a diversified entertainment company.

It now operates five sprawling Rec Room complexes, which offer dining, live entertainment and amusement games under one roof, with plans to open 10 to 15 more over the next few years. The company is also rolling out redesigned Playdium amusement centres − an entertainment and casual dining concept aimed at teens and families − and signed a deal last year with U.S.-based Topgolf Entertainment Group to open golf-themed complexes in Canada.

Story continues below advertisement

Cineplex generates revenue from other sources as well, such as competitive video gaming events and a media division that operates a growing network of digital displays in restaurants, malls, banks and other venues.

Many of Cineplex’s diversification efforts are in the early stages, but RBC Dominion Securities analyst Drew McReynolds, who has an “outperform” rating on the shares, said in a note that his “investment thesis is predicated on a steady reflation in equity value from current levels as diversification initiatives begin to scale in 2018/2019.”

Adam Shine of National Bank Financial also sees growth in revenue and earnings over the next couple of years. His recently updated estimates call for revenue to rise 6.3 per cent to $1.65-billion in 2018 and 7.3 per cent to $1.77-billion in 2019. Including $25-million in targeted cost savings, Mr. Shine predicts earnings per share will rise to an estimated $1.41 this year and $1.64 next year, up from $1.07 in 2017. Based on Cineplex’s current stock price, the 2019 EPS estimate implies a price-to-earnings multiple of about 18.6.

In recent weeks, investors seem to be reassessing their outlook for Cineplex. The shares have gained more than 10 per cent since hitting a 52-week low of $27.56 in early May following the first-quarter results, yet still remain well below their 2017 high of more than $54.

Investing in Cineplex isn’t a slam dunk. The movie business is notoriously volatile, and streaming services aren’t going away. What’s more, Cineplex’s expansion initiatives depend on discretionary spending by consumers, who could decide to cut back on entertainment and dining out if the economy stumbles.

But if the analysts are right and Cineplex can get out of its current jam, this movie could have a happy ending after all.

Story continues below advertisement

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

If your comment doesn't appear immediately it has been sent to a member of our moderation team for review

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.