Is Cineplex Inc. a Strong Buy After its Record Q3 Results?

Cineplex Inc. (TSX:CGX) announced record third-quarter results on November 10, and its stock has reacted by rising 2.5%. Is now the time to buy?

| More on:

Cineplex Inc. (TSX:CGX), Canada’s largest owner and operator of movie theatres, announced record third-quarter earnings results before the market opened on November 10, and its stock responded by rising 2.5% in the day’s trading session. Let’s take a closer look at the results to determine if this could be the start of a sustained rally higher and if we should be long-term buyers today.

Strong attendance leads to record revenues

Here’s a summary of Cineplex’s third-quarter earnings results compared with what analysts had expected and its results in the same period a year ago.

Metric Q3 2015 Actual Q3 2015 Expected Q3 2014 Actual
Earnings Per Share $0.34 $0.38 $0.25
Revenue $328.25 million $326.63 million $298.99 million

Source: Financial Times

Cineplex’s earnings per share increased 36% and its revenue increased 9.8% compared with the third quarter of fiscal 2014. The company’s double-digit percentage increase in earnings per share can be attributed to its net income increasing 34.7% to $21.44 million, helped by its total operating expenses increasing just 7.7% to $298.35 million, including its film cost increasing just 7.1% to $91.57 million.

Its very strong revenue growth can be attributed to its total attendance increasing 7.6% to 19.41 million, primarily due to “a stronger performing slate of films,” which led to its box office revenues increasing 6.1% to a record $172.57 million and its food service revenues increasing 14.5% to a record $105.46 million.

Here’s a quick breakdown of 10 other notable statistics from the report compared with the year-ago period:

  1. Box office revenues per patron decreased 1.3% to $8.89
  2. Concession revenues per patron increased 6.3% to a record $5.43
  3. Concession margin per patron increased 6.7% to $4.28
  4. Media revenues increased 7.2% to a record $34.3 million
  5. Gaming and other revenues increased 29.1% to a record $15.92 million
  6. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 23% to a record $59.08 million
  7. Adjusted EBITDA margin improved 190 basis points to 18%
  8. Income before income taxes increased 36.3% to $29.9 million
  9. Net cash provided by operating activities increased 58.3% to $36.27 million
  10. Adjusted free cash flow remained relatively unchanged at $35.86 million

What should you do with Cineplex stock today?

It was an outstanding quarter overall for Cineplex, so I think its stock has responded correctly by moving higher. I also think this could the start of a sustained rally to new all-time highs and I think it should be bought by all investors today, because it still trades at inexpensive forward valuations and because it has a high dividend and is a dividend-growth play.

First, Cineplex’s stock trades at 32.7 times fiscal 2015’s estimated earnings per share of $1.57, which is sustainable, but it trades at just 25.4 times fiscal 2016’s estimated earnings per share of $2.02, which is very inexpensive compared with its five-year average price-to-earnings multiple of 30.4 and the industry average multiple of 44.5.

At the very least, I think the company’s stock could trade at a fair multiple of 30, which would place its shares upwards of $60.50 by the conclusion of fiscal 2016, representing upside of more than 17% from today’s levels.

Second, Cineplex pays a monthly dividend of $0.13 per share, or $1.56 per share annually, giving its stock a 3% yield. It is also very important for investors to note that the company has raised its dividend for five consecutive years, and its ample free cash flow generation, including $104.35 million in the first nine months of fiscal 2015, could allow this streak to continue in 2016.

With all of the information provided above in mind, I think Cineplex represents one of the best long-term investment opportunities in the market and the best long-term investment opportunity in the entertainment industry today. All Foolish investors should strongly consider beginning to scale in to positions over the next couple of weeks.

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 Joseph Solitro has no position in any stocks mentioned.

More on Dividend Stocks