The Motley Fool

Cineplex Inc. Looks Like an Immediate Buy—But Is it?

Imagine finding a company that increased its net income 59.1% and total revenue 19.5%. Then imagine that it pays a really lucrative 3.06% dividend, which comes out to right around $1.50/share. Now, imagine me telling you that I was a little skeptical of this company, despite these amazing numbers.

You’d say I was crazy, but when it comes to Cineplex Inc. (TSX:CGX), I’m not entirely sure the company is an immediate buy, despite the fact that all the numbers say the contrary. This presents an interesting discussion on whether or not numbers alone can dictate if an investment is a good one.

For me, Cineplex seems to be a bit of a risky stock because it is a movie theatre operator. And from a long-term perspective, I see movie theatres going away. Why pay $12 per person to see a movie and then eat stale, gross popcorn when you can spend $20 to rent the movie at home for the whole family and then eat delicious popcorn?

There’s a slow-growing trend of movies being released straight to streaming sites. Each time this happens and the movie is successful, more vendors start to consider moving their movies out of the theatre and into the living room.

If compare this year’s revenue to last year’s, box office revenue decreased 2.9% and revenue per person decreased 3.8%. People don’t want to go to the theatre because it’s too expensive. Does that mean movie theatres—and Cineplex—could go the way of Broadway theatres and slowly disappear?

With this information in mind, I am a little skeptical about how much Cineplex will be able to grow as a long-term stock.

There is hope

Cineplex can see the trend as well. The company knows that movie theatres are going to become a dying business, but if the company can milk it as long as possible, it will. This will allow Cineplex to focus on its strategy of diversification. One of the primary goals of Cineplex is for 25-50% of EBITDA to come from places other than its theatres.

One example is its new Rec Room destinations. These are multi-purpose venues that can target multiple demographics. Whether it’s dining, gaming, or watching sports on large theatre screens, everyone will be able to find a place here. There are 10-15 Rec Room destinations planned for the next few years.

And that’s what gives me hope for Cineplex. Comparing revenue this year to last, Digital media rose 40.8%, Gaming revenue rose 8.4%, and “other” revenue increased 17.3%. Every sector but its theatres are growing and that is going to give Cineplex a lot of room to expand as a company.

So, when you buy Cineplex, don’t think that you’re buying a movie theatre. You are buying a multi-purpose entertainment suite, because that’s what this forward-thinking company is positioning itself as. And with that 3% dividend, you’ll make plenty of money as that transformation takes place.

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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 Jacob Donnelly has no position in any stocks mentioned.

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