Here's Why Cineplex Inc. Should Be a Core Holding

Here’s Why Cineplex Inc. Should Be a Core Holding

Impressive 2015 results send Cineplex Inc. (TSX:CGX) higher.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published February 10, 2016 8:36 am EST

Cineplex Inc. (TSX: CGX) once again impressed investors with solid results that show increasing attendance and strong performance out of every segment. Here are five trends that lead me to believe that Cineplex should be a core holding in your portfolio.

Strong box office revenues

Box office revenues represented 59% of total revenues in the quarter and 52% of revenues for the year. Revenues increased 13.8% in the fourth quarter and 5.7% for the full year. Breaking this number down, fourth-quarter attendance increased 7.1%, and box office revenue per patron increased 6.3%.

A big driver of this performance was the success of Star Wars: The Force Awakens, but also because box office revenues from premium-priced products increased significantly and represented 46.8% of box office revenues compared to 29.4% in the same period last year.

Keep in mind that gross margins on box office revenues are significantly below gross margins on the company’s other sources of revenues, particularly the media segment. Box office gross margins are in the 50% range, while gross margins on media revenues, for example, are over 80%. In the long term, it is the goal of management to generate 25-50% of EBITDA from non-Hollywood products. It should be at close to 20% by the end of 2016.

Strong food service revenue

Concession revenue increased 16.4% in the fourth quarter and accounted for 34.3% of total revenue. This was due to the increase in attendance as well as an 8.6% increase in concession revenue per patron to $5.58 from $5.14.

The company has made efforts to expand its food offerings in the cinema as well as to expand its food offerings in the VIP theatre, and this has translated into higher transaction values.

Strong cash flow generation

Adjusted free cash flow per share increased 23.5% in the fourth quarter, and the company’s balance sheet is strong with a debt-to-capitalization ratio of 37%. This will enable the company to continue to invest in the growth in its non-Hollywood segments.

The company currently has a healthy dividend yield of 3.17%.

Future opportunities

Cineplex will continue to focus on growing its gaming business both organically and through acquisitions, and the acquisition of the remaining 50% of Starburst Inc. will allow Cineplex to continue to grow both in Canada and in the U.S.

The E-Sports opportunity is also one that management continues to focus on with the first tournament finals taking place in March at Scotiabank theatre. Cineplex is seeing strong interest from gamers as well as advertisers.

Management also believes that the media business represents another promising area of growth.

In conclusion

The Cineplex management team has shown that they are a forward-looking, pro-active team with a focused strategy aimed at reinventing their business in the long term. And with growth coming from all segments of the business and total revenue up 22.6%, management is clearly finding success with this.