This Entertainment Company is a Potential Blockbuster Investment

Lights, camera……invest?

The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

By:  Colin Tweel

Like afternoon baseball games and crowded beaches, blockbuster movie releases are a staple of summer. If your summer visits to the local movie theatre, like mine, are accompanied by feelings of bewilderment over $13.00 admission tickets and $10.00 bags of popcorn, then you have strong reason to consider investment options in the movie industry.

Two prominent Canadian companies, Cineplex (TSX: CGX) and IMAX (TSX:IMX,NASDAQ:IMAX), and American behemoth Regal Entertainment (NYSE: RGC) are some of the primary beneficiaries of consumers’ free-wheeling spending on summer entertainment.

Cineplex’s push to capitalize on towering margins

Cineplex is the largest movie exhibitor in Canada, operating 1500 movie screens that serve 70 million guests annually. The company’s income is derived from two main sources: box office revenue, representing roughly 60% of total sales, and concession revenue, representing approximately 30% of total sales. The remaining 10% of revenue comes from various activities, including selling advertising time and space and operating gaming consoles in theatres.

Cineplex enjoys remarkably high operating margins on the sale of movie tickets and concessions. Before accounting for fixed costs, such as rent and capital improvement, close to 50% of every dollar spent on movie tickets and 80% of every dollar spent on concessions represents profit for Cineplex.

With limited variability in film and concession costs, and predictable rent and capital expenditures in the short-term, Cineplex’s annual profit is largely a function of movie attendance. The high margins on the sale of theatre tickets and concessions mean that Cineplex’s business succeeds when the public attends movies.

In a record-setting 2012, attendance at Cineplex theatres increased by 8% over 2011, resulting in double digit increases in box office and concession revenue. The revenue and attendance increases were largely a result of Cineplex bringing on line new theatres through acquisitions and capital upgrades.

In 2013 Cineplex has continued its expansion. This past June Cineplex entered an agreement to purchase 26 theatres from its chief Canadian rival, Empire Theatres, and opened for business newly renovated theatres in Toronto, Saskatoon and Vancouver.

Cineplex trades at a price-to-earnings multiple of 20, well below the industry average of 28. With consistent dividends in the last eight quarters, stable increases in the stock price over the past 5 years, and a beta of 0.14, Cineplex has the markings of a low-risk, low-reward stock. However, the company’s strong 2012 performance and active expansion in 2013 suggest the possibility for steady upside from this relatively cheap stock.

IMAX looks abroad to revitalize its core business

IMAX participates in more facets of the movie industry than Cineplex. It is the world’s largest designer and manufacturer of premium projection and sound equipment for movie theatres and derives its income from three primary activities: 1) selling and servicing patented IMAX projection systems; 2) producing, distributing and exhibiting films; and 3) revenue sharing agreements with movie exhibitors using IMAX theatre systems.

With a beta of 1.6, IMAX stock is considerably more volatile than Cineplex, but has also appreciated in value more significantly than Cineplex. After tripling in price in the last five years, the stock now trades a price-to-earnings multiple of 40.

In 2012 IMAX experienced a significant shift in its revenue. The company’s traditional core business – the sale of IMAX projection systems – fell by 10%, while revenue from film production and distribution increased by over 30%.

Intent on maintaining strength in its traditional core market, in 2013 IMAX has pursued sales of its projection systems in international markets. While less than half of the IMAX systems currently in operation are located outside of Canada and the U.S., IMAX expects that ratio to change significantly in the coming years. In June, IMAX announced the expansion of an agreement with CJ CGV Holdings for the installation of 95 IMAX theatres across China and South Korea.

Regal struggles at the box office

Regal Entertainment operates the largest movie theatre circuit in the U.S., consisting of more than 7,000 screens in over 500 theatres.

Like Cineplex, Regal derives the majority of its income from box office and concession sales, on which the company has robust margins of 50% and 85% respectively. However, unlike Cineplex, Regal’s attendance figures are trending downward. From annual attendance figures over 240 million in 2008 and 2009, annual attendance at Regal’s theatres fell to less than 220 million in 2010, 2011 and 2012.

Mostly as a result of price increases, Regal now generates higher revenue per customer than it did in 2009, however, with decreased attendance, the company recorded less revenue in 2012 than it did in 2009.

Reflecting investor concern over weak attendance and revenue figures, Regal’s stock has underperformed the industry in general and IMAX and Cineplex in particular over the last five years. On account of limited investor confidence in future growth, the company trades at a price-to-sales ratio of 1, well below IMAX’s price-to-sales ratio of 7 and Cineplex’s ratio of 3. However, by valuation metric focused on profit, in spite of the stock’s weak recent performance, it is still relatively expensive: Regal trades at a price-to-earnings multiple of 25, a sizeable premium over Cineplex.

Two thumbs up for Cineplex

At a steep earnings discount to its competitors, Cineplex is a worthwhile investment. By purchasing stock in Cineplex, an investor gains a stake in a stable, dividend-producing company that is engaged in organic and acquisition-fueled expansion that can take the stock new heights.

The great ideas don’t stop here

Any company that can charge $10 for a bag of popcorn is clearly doing something right.  For a look into 5 more Canadian companies that are clearly doing something right, click here now and we’ll send you our FREE report “5 Stocks to Replace Your Canadian Index Fund”.  One of these companies just got taken out at a huge premium.  To find out about the other 4, click here now.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

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

Fool contributor Colin Tweel does not owns shares in any of the company’s mentioned.  The Motley Fool owns shares of Imax. 

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

Profit dial turned up to maximum
Tech Stocks

$1,000 Invested in Constellation Software Stock Would Be Worth This Much Today

Constellation Software (TSX:CSU) is trading above $2,000 today. Why this stock is so expensive, and is it worth buying?

Read more »

Dividend Stocks

Passive Income: 3 Top Canadian Stocks to Buy for Monthly Dividends

Companies such as Pembina Pipeline and Killam Apartment REIT pay investors monthly dividends, making them top bets for income-seeking investors.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Stocks for Beginners

TFSA Investors: Top TSX Stocks to Buy With $6,000

Here are two safe, dividend-paying TSX stocks for your long-term portfolio.

Read more »

Gold medal
Investing

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Are you looking for growth stocks that could be huge winners in the next decade? Here are three top picks!

Read more »

Retirees sip their morning coffee outside.
Investing

Retirees: How to Make Over $95/Week in Passive Income TAX FREE!

Canadian retirees who are hungry for passive income should look to snag stocks like Sienna Senior Living Inc. (TSX:SIA) in…

Read more »

Man holding magnifying glass over a document
Investing

Where to Invest $500 in the TSX Right Now

Given the massive correction, long-term investors can start buying stocks like Shopify and goeasy to outpace the broader markets by…

Read more »

Aircraft wing plane
Investing

Air Canada Stock Is a Fantastic Deal Right Now

Air Canada (TSX:AC) is a great stock to own, as market fear turns into hope amid falling recession fears.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Investing

Beginner Investors: Get Passive Income by Investing in REITs!

You can get passive income by investing in REITs like Northwest Healthcare Properties REIT (TSX:NWH.UN).

Read more »