The Stock Picker’s Guide to Cineplex

Do shares in Canada’s largest movie theater company have a bright future?

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If you go out to watch a movie in Canada, chances are you’ll be heading out to one of Cineplex’s (TSX: CGX) 161 theaters, located in all 10 Canadian provinces.

The company operates several different kinds of screens, including ones that are 3D capable and have enhanced video and audio options called UltraAVX. It also has theaters with huge screens provided by IMAX (TSX: IMX)(NASDAQ: IMAX). Cineplex charges customers extra for the privilege of watching progressively better screens.

2013 was a good year for the company. Revenues were up more than 7%, reflecting the company’s ability to charge movie patrons more, and convince them to stop off at the concession stand before heading to their theater. Total attendance was up 2.1%, to 72.7 million people. Cineplex also benefitted from its acquisition of 24 theaters from Empire, which beefed up the company’s exposure to atlantic Canada significantly.

Cineplex set records in 2013 for both average revenue per box office patron and for concession revenue per patron, with each coming in at $9.42 and $4.94, respectively. There have always been fears that big screen TVs and surround sound systems would keep people watching movies at home and out of the theater, but those fears have continued to be squashed by the company’s results.

Cineplex has solid financials as well. Free cash flow in 2013 was $2.46 per share, up 18% compared to 2012. The company took on a little debt to pay for the Empire acquisition, but it still has a debt-to-equity ratio of less than 0.5. There’s easily enough cash flow to cover the interest on the debt and its dividend, which currently yields 3.4%.

Investors may be treated to a dividend increase in 2014. The dividend payout ratio was about 58% of 2013’s free cash flow, but that number should increase in 2014 as the company has a full year of earnings from the Empire theaters under its belt. It also increased the dividend in early 2013, so management does have a recent history of rewarding shareholders.

Don’t look for those ads that you’re forced to sit through before the movie starts to go away. Cineplex has done a nice job of monetizing that dead time, as the company’s media revenues were up 30% compared to last year. Media revenues accounted for 15% of total revenues for 2013.

The company also acquired EK3, which will allow it to offer the same type of advertising to consumers outside the theater via digital signage at stores. EK3, which the company renamed CDN, only did $10 million in revenue for 2013, but has terrific growth potential.

Cineplex also offers the opportunity to watch live events on its screens. It shows everything from the Oscars to many different live sporting events. The response to this so far has been fantastic, and the company will continue to expand its offerings in the future.

The company also offers membership in the SCENE loyalty program, which lets patrons earn points they can use to watch free movies or get discounts at the concession stand. Bank of Nova Scotia offers debit and credit cards that allow customers to accumulate points, and Cineplex ran SCENE point promotions with many of Canada’s best known businesses in 2013. These efforts paid off, as SCENE members increased 25%. More than 5 million Canadians are SCENE members.

In the short term, the biggest risk for Cineplex is a lackluster slate of offerings for the summer movie season. If patrons aren’t excited about what’s at the theater, they simply won’t show up. This hurt the company a few years ago, and is always a risk for Cineplex investors.

Foolish bottom line

The future looks bright for Canada’s largest chain of movie theaters. Revenue continues to creep up, the company’s media division is growing nicely, it’s made a nice acquisition recently, and it continues to think of ways to get patrons to spend money at the movies, with relatively new concepts like full service restaurants and selling movie merchandise.

Going to the movies is still a treat many Canadians enjoy on a regular basis, and it doesn’t look like that’s going to be replaced by technology in our living room any time soon.

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.

Fool contributor Nelson Smith has no position in any stock mentioned in this article. 

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