All too often, I see investors buy a company when it has already peaked and then they lament when they lose money. That results in them avoiding the stock market, which means that they don’t have the chance to benefit from the income and growth that comes from a well-diversified portfolio.
On the surface, Cineplex Inc. (TSX:CGX) looks like one of those companies whose glory days are behind it. It is a movie theatre business in a world where more people stay at home and companies like Netflix release films straight to the living room.
Yet if you peel back the layers of Cineplex, what you see is a company that is innovating and becoming so much more than just a movie theatre business. While it will always be in the theatre business, it is the other parts of the company that are going to help it diversify from an over-reliance on Hollywood productions.
According to the company, one of its main goals is to diversify the business, so that 25-50% of EBITDA comes from sources other than its theatres. The idea behind this is that even if the theatre business suffers, it will still be able to generate significant revenue from other sources.
One sector that I am particularly bullish on is the launch of the company’s Rec Rooms. These are multipurpose venues that are meant to cater to the entire family. Sports and beer for Dad? Check. Arcade games for the kids? Check.
What the Rec Room does is bring the entire family under one roof and make money from each demographic. Unlike movies, though, this doesn’t depend on a great action flick from Hollywood. It simply depends on the family wanting to do a family outing. Over the next few years, Cineplex plans to launch 10-15 of these Rec Rooms across Canada.
But Cineplex isn’t stopping there. There’s a phenomena where people derive pleasure from watching other people play video games in a competitive landscape. It’s called eSports, and Cineplex is investing $10 million to acquire 80% of WorldGaming, plus an additional $5 million to create a new league. This business is huge. In 2014, 27 million people watched the world championship of League of Legends.
Now, imagine if people came to the theatres to watch that and, along the way, purchased food, drinks, etc. This would result in further concession revenue for the company. Further, all the sponsors of the new league would create increased ad revenue for the company. Through all of this, it’s become clear that the company is not just about what Hollywood can put on the screen.
What’s good for investors is that while the company continues to grow, it pays a very lucrative dividend. It pays $0.13 per quarter, which comes out to an approximate yield of 3.25%. Over the past five years, it has increased the dividend, so I expect that it will continue to do this. So long as the company is experiencing growth, management will likely reward investors. In my book, that makes Cineplex a slam dunk for any portfolio.
