Is Cineplex Inc. a Worthy Addition to Your Portfolio?

Despite being an expensive stock, Cineplex Inc. (TSX:CGX) is diversifying into multiple revenue streams that minimize its dependence on Hollywood.

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When I first joined Fool, I believed that Cineplex Inc. (TSX:CGX) would be obsolete due to many of the streaming companies looking to create “direct to home” movies. But Cineplex learned to redefine itself and diversify into multiple revenue streams and is now actually very worthy for any portfolio.

However, there is one question: At today’s valuations, is Cineplex too expensive?

While the bulk of the revenue that Cineplex generates comes from its movie theatre business, it is actually a diversified entertainment company.

First up is obviously its movie business. One of my initial concerns about this was its dependence on Hollywood creating quality movies. With the release of Star Wars and Jurassic World last year, there is little doubt that Hollywood is making solid movies.

In 2016 there will be many solid movies coming out that are built on franchises. There’s Captain America: Civil WarJason Bourne, and the final Divergent movie. Ending the year will be another Star Wars movie, which boosted Cineplex in 2015. All told, Cineplex has plenty of really strong movies coming to its theatres.

But it’s not just Cineplex’s movie business I like…

In an attempt to reduce its reliance on Hollywood blockbusters, Cineplex has been working on a new project called the Rec Room. These are large, multi-purpose destinations that are targeted at the entire family. Rather than someone going to see a movie and then leaving after, the Rec Room is meant to offer food, drink, and games for as long as the family wants to stay. Over the next few years the company will launch 10-15 of these, which should significantly increase its concession revenue.

Further, Cineplex is also moving into the eSports business, in which people watch professional video game players compete with each other. For context, in 2014, 27 million people watched the League of Legends championship. Since Cineplex owns the giant screens already, it’s a great way to get people into the theatre along with buying food and drink. The company acquired 80% of WorldGaming, which will allow it to grow its advertising revenue.

Here’s the one negative: it’s an expensive stock. With a P/E of 23.76, the company would have to seriously increase its earnings for this stock to be considered cheap at the time of purchase. And while I do believe earnings are going to increase as the Rec Room and eSports business develops, it’s going to take time.

The good news for investors is that the company pays a 3.09% yield, which is $0.13 per share per month. I like Cineplex and I believe that the stock has a bright future ahead of it; however, it is an expensive stock. If you’re looking for stocks that are cheaper, you may want to avoid this one. But if you’re looking for a company that is diversifying its entertainment revenue streams, Cineplex is a solid buy.

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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