Here at the Fool, we love industry leaders with wide economic moats, meaning the company can sustain its competitive advantages over the long term. Companies with a wide moat align with the Fool’s “buy-and-hold” approach. It gives investors assurance that these types of companies can remain profitable and maintain their market share over many years. Therefore, Foolish investors are always looking to buy shares in these types of companies.
Cineplex Inc. (TSX:CGX) currently has a market share of 78.7% in the Canadian theatre industry and offers a steady yield of 3%. Is Cineplex currently “selling tickets” to strong returns over the long term?
Here’s a look at the company.
Company overview
Over 77% of Cineplex’s revenue derives from the box office and food service sales, and the company is continually expanding and improving each revenue stream.
Over 46% of box office sales came from premium experiences such as D-Box, VIP Cinemas, and UltraAVX. These services provide customers with enhanced movie experiences and allow the company to justify premium pricing for its services, resulting in stronger cash flows. Due to the company’s market and financial position, it will be extremely difficult for its competitors to emulate these services, which widens the company’s moat.
As for its food service sales, two main areas of focus have been speed of service and its premium promotional programs. This focus has translated in its concession per patron growing by an annual average of 4.4% over the past decade! Therefore, the company has demonstrated its ability to improve its traditional revenue streams as well.
In addition, the company’s upcoming movie schedule looks very promising with films such as Guardians of the Galaxy 2; Pirates of the Caribbean: Dead Men Tell No Tales; and Star Wars: The Last Jedi. Therefore, after a slight dip in attendance in 2016, Cineplex should reach record attendance levels with these films on tap.
Current valuation
Based on the stock’s current levels, investors will have to pay for a “premium ticket.” The company is currently trading at a price-to-earnings and price-to-book ratio of 42.9 and 4.6, respectively, both of which are well above the company’s five-year average of 28.4 and 3.6. Therefore, based on the company’s earnings, investors will have to overpay to acquire this industry leader today.
However, with such a dominant market position and a track record of performance, some investors may want to overpay. The company has increased its dividend in each of the past six years and demonstrated its ability to enhance the theatre experience. Therefore, as long as people continue to go to the big screen, Cineplex will remain very profitable.
Foolish bottom line
There are a lot of things to like about this company, but I don’t believe investors should overpay for this stock. I believe the company will maintain its leadership position for years to come; however, I feel there are far better opportunities to be had in other areas in the market. Investors should wait to add this stock until the valuation becomes more reasonable.
