How Does Cineplex Inc. Stack Up Against U.S. Peers?

Well! Sort of…….

| More on:
The Motley Fool

The Memorial Day weekend in the U.S. stands for a lot of things, one of which is the opening of summer blockbuster movie season.

While the business of making movies is a big one, so too is the business of showing those movies.  Even though home viewing options have come a long way, lot’s of people (although not the one’s with 3 young kids at home) still take in their movies the ol’ fashioned way.  At the theatre.

The dominant Canadian player in this space is Cineplex (TSX:CGX).  Cineplex operates 136 theatres from British Colombia to Quebec and serves approximately 71 million guests on an annual basis.  When most Canadians go to the movies, they go to a Cineplex theatre.

The stock

Cineplex is also a publicly traded company.  And a good one at that.  Over the past 3 and 5 years, Cineplex shares have registered a total return of 100.6% and 194.0% respectively.  This compares to the S&P/TSX Composite return over these periods of 7.8% and -12.8% respectively.

One of the problems that people have when it comes to evaluating Cineplex is that there really isn’t another company like it in Canada.  Therefore, to put Cineplex into context, we need to look south of the border for a comparable or two.

Peer compare

Two names jump out when it comes to U.S. theatre companies.  The bigger of the two, in terms of market capitalization, is Cinemark Holdings (NYSE:CNK).  The other is Regal Entertainment (NYSE:RGC).

Although both operate significantly more theatres than Cineplex, the numbers behind these companies show that bigger isn’t necessarily better.

Cineplex is clearly a stronger entity based on 2 of the 3 financial statements.  Tabled below are a few metrics that demonstrate Cineplex’s relative strength when it comes to the cash flow statement and balance sheet.

Cineplex

Cinemark

Regal Ent.

Levered FCF Margin

9.0%

6.7%

6.6%

Total Debt/Capital

20.2%

63.5%

145.9%

Interest Coverage

12.8

3.0

2.3

Source:  Capital IQ

As the levered free cash flow margin demonstrates, Cineplex does a far better job of turning each dollar of sales into free cash flow than the other two names.  And, its balance sheet is much cleaner.  In fact, we couldn’t even look at a debt/equity ratio compare here because Regal carries negative equity.

The catch

What you get in quality, you give up in growth and valuation.  Year-over-year EPS growth at Cineplex is expected to check in at 5.7%.  This pales in comparison to Cinemark, which is expected to grow earnings this year at a rate of 18.5% as the company leverages its South American presence.  Regal is expected to post no EPS growth in 2013 according to Capital IQ.

Given that Cineplex has basically saturated the Canadian landscape, it’s little surprise that this challenge exists.

In addition, Cineplex trades at a premium to its U.S. peers in terms of its forward earnings multiple.  Cineplex’s forward P/E multiple sits at 19.9 vs. 16.4 for Cinemark and 17.8 at Regal.

The Foolish Bottom Line

Even though Cineplex has some superior attributes, growth will be an ongoing challenge and therefore, Cineplex is too richly priced for this Fool.  However, it’s no doubt a quality name and should our market, aside from resource stocks, ever sell-off again, investors should be waiting with open arms to welcome this company into their portfolios.

Just like Cineplex dominates the Canadian movie theatre space, the 3 companies profiled in the Motley Fool’s Special Free Report3 U.S. Stocks Every Canadian Should Own” dominate the global industries in which they participate.  To download a copy of this report at no charge, simply click here!

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares of any of the companies mentioned at this time.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Businessman holding AI cloud
Tech Stocks

2 Stocks That Could Grow Your Portfolio Over the Next Decade

These two TSX stocks could be stellar additions to your long-term portfolio, given their multi-year growth potential and discounted stock…

Read more »

Wireless technology
Tech Stocks

These Tech Stocks Are Growing up to 138% Despite the Recession

Growth stocks like WELL Health Technologies (TSX:WELL) are thriving, despite the recession.

Read more »

close-up photo of investor Warren Buffett
Stocks for Beginners

New to Investing? Here’s 1 of Warren Buffett’s Most Important Quotes

As market uncertainty continues to intensify, here's some advice from the Oracle of Omaha to help you navigate this environment.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

Want Easy Passive Income? Go With These 3 Canadian Dividend All-Stars

Are you looking for easy passive income? Here are three Canadian dividend all-stars.

Read more »

Man data analyze
Investing

3 of the Top-Growing Stocks on Earth

Canadians desperate for growth in a shaky market may want to look to growing stocks like Cardinal Health Inc. (NYSE:CAH).

Read more »

Nickel ore is mined from the ground.
Metals and Mining Stocks

Offset Market Volatility With a Shiny Investment

Looking to offset market volatility with a shiny investment you can hold for the long-term? Here’s a precious option to…

Read more »

grow dividends
Tech Stocks

BlackBerry (TSX:BB) Stock: The Best Buy for Your RRSP

BlackBerry stock is still falling after its quarterly result, despite a 28% revenue increase in its Internet of Things segment.

Read more »

green energy
Dividend Stocks

These Monthly Dividend Payers Could Carry Your Portfolio for Years

Building a portfolio takes years. Without further ado, invest in these monthly dividend payers and start earning.

Read more »