On the surface, Cineplex Inc. (TSX:CGX) is not like any stock that I would advocate owning.
With the increase in streaming companies creating their own original content, plus studios considering direct-to-video releases, there’s no denying that the movie theatre business could be in for changes to the ways they generate money. Yet as I’ve dug deeper into Cineplex, I can’t help but feel that this company has a short- and long-term strategy that it is executing flawlessly.
We can see this in its recent third-quarter earnings results, which it released on November 10. Compared with the third quarter of 2014, its revenue has increased 9.8% and its earnings per share have increased 36%. For context, it earned $298.99 million in Q3 2014, but earned $328.25 million in Q3 2015. That’s an incredible increase in revenue year over year.
One of the primary drivers of this was the 7.6% increase in audience members to 19.41 million. Because of this increase in audience members, it was able to increase its box office revenues by 6.1% and its food service revenues by 14.5%.
But there’s a problem with these numbers, which I believe Cineplex recognizes, which explains its long-term strategy. Management said that this increase in numbers was due to the higher-quality movies that came out. If the quality of the content is great, more people will go to the movies. The problem with this is that it makes Cineplex dependent on Hollywood to create great movies. It’s never advisable to be in a business that is dependent on someone else for what it sells.
Diversification is coming
Because of this, Cineplex is looking to diversify its business, so it can generate more money from what it controls. One example of this is its Rec Room initiative. These are large, multi-purpose locations that are meant to target multiple demographics irrespective of Hollywood. For example, a family of four could each be entertained. Mom and Dad can relax and the kids can play games.
The revenue per patron would be collected on games, food, and beverages. On top of that, the people could spend more time there because there is no start and stop as there is with movies. Over the next few years Cineplex plans to roll out 10-15 of these Rec Rooms.
But while the Rec Rooms are great, Cineplex already has a large network of silver screens. Cineplex recently made an acquisition for 80% of WorldGaming, which is one of the top eSports businesses. Electronic sports is watching people play competitive video games. In 2014, for example, 27 million people watched the people play League of Legends.
Cineplex’s eSports strategy is simple: it wants to get people to come in to watch the championship on much larger screens than they would at home, and then encourage them to buy concessions. Further, since it owns 80% of WorldGaming, the company will consider launching its own eSports league, which will allow it to increase its advertising dollars via sponsors.
All of this tells me that Cineplex is a strong buy. It pays a 3.12% yield, which comes out to $0.13 per quarter. Further, because the company is growing, the dividend is growing. It has increased consistently over the past five years. Growing dividends and diversification when the primary business is evolving are things I look for in a company, and Cineplex has them.
