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.
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.
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.