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3 Reasons Why Cineplex Inc. Could Continue to Outperform the Market

Cineplex Inc. (TSX:CGX), Canada’s largest owner and operator of movie theatres, has been one of the market’s top performing stocks in 2015, rising over 4.5% as the TSX Composite Index has fallen nearly 7.5%, and I think it will continue to rise over the next several years. Let’s take a look at three of the primary factors that could send its shares higher in both the short and long term, so you can decide if it should become a core holding in your portfolio.

1. Its strong financial performance could support a near-term rally

On August 13, Cineplex released very strong earnings results for its three and six-month periods ending on June 30, 2015, but its stock has responded by falling nearly 1.5% in the weeks since, primarily due to the downturn in the market. Here’s a summary of 10 of the most notable statistics from the first half of fiscal 2015 compared with the first half of fiscal 2014:

  1. Net income increased 27.3% to $36.01 million
  2. Earnings per share increased 26.7% to $0.57
  3. Revenue increased 5.3% to $635.33 million
  4. Box office revenues increased 1.4% to $342.24 million
  5. Food service revenues increased 7.6% to $199.18 million
  6. Attendance increased 1.8% to 37.23 million
  7. Box office revenues per patron decreased 0.4% to $9.19
  8. Concession revenues per patron increased 5.7% to $5.35
  9. Adjusted earnings before interest, taxes, depreciation, and amortization increased 16.9% to $105.56 million
  10. Adjusted free cash flow increased 2.1% to $68.49 million

2. Its stock trades at inexpensive forward valuations

At current levels, Cineplex’s stock trades at just 29.4 times fiscal 2015’s estimated earnings per share of $1.60 and only 22.8 times fiscal 2016’s estimated earnings per share of $2.06, both of which are inexpensive compared to the industry average price-to-earnings multiple of 42.3 and its long-term growth potential.

I think Cineplex’s stock could consistently trade at a fair multiple of at least 32, which would place its shares upwards of $51 by the conclusion of fiscal 2015 and upwards of $65 by the conclusion of fiscal 2016, representing upside of more than 8% and 38%, respectively, from today’s levels.

3. It has a 3.3% dividend with an active streak of annual increases

Cineplex pays a monthly dividend of $0.13 per share, or $1.56 per share annually, which gives its stock a 3.3% yield at current levels. Investors should also note that the company has increased its annual dividend payment for four consecutive years, and its 4% increase in May puts it on pace for 2015 to mark the fifth consecutive year with an increase, and its increased amount of free cash flow could allow this streak to continue for the next several years. 

Does Cineplex belong in your portfolio?

I think Cineplex will outperform the overall market in both the short and long term, because its strong financial performance in the first half of fiscal 2015 could support a rally, because its stock trades at inexpensive forward valuations, and because it has a 3.3% dividend yield with a track record of increasing its annual payment, which will continue to attract income investors. Foolish investors should take a closer look and strongly consider making it a core holding today.

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Fool contributor Joseph Solitro has no position in any stocks mentioned.

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