Cineplex Inc.: A Buy on the Star Wars Craze?

Cineplex Inc. (TSX:CGX) will benefit immensely from Star Wars, but it will also benefit from its diversification strategy.

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It’s looking more and more like the US$4.05 billion that Walt Disney Co. (NYSE:DIS) paid for Star Wars is really paying off. Movie theatres like Cineplex Inc. (TSX:CGX) are likely benefiting quite a bit as well.

According to multiple reports, Rogue One: A Star Wars Story brought in US$155 million in the first weekend and US$96.1 million over the holiday weekend in the United States and Canada.

But does all this Star Wars craze actually make Cineplex worth buying?

In many respects, yes. While there are many other initiatives that Cineplex has going for it, it is still very much dependent on Hollywood for its success. Therefore, with movies like Star Wars coming out on a regular schedule, it’s anticipated that Cineplex will benefit from this collection of films.

If we look at how the company did last year when Star Wars: The Force Awakens first came out, it’s clear that Star Wars craze can make companies very successful.

Revenue in the fourth quarter was $407 million–up by almost 25% year over year. And net income was $76.8 million–more than double a year earlier. A big part of this was an 8.6% increase in concession revenues.

While demand for Rogue One is not as significant as The Force Awakens, I anticipate this quarter to be a strong one for Cineplex strictly because of Star Wars.

And there are plenty more Star Wars movies planned. Episode 8 is due out on December 15, 2017; the untitled Han Solo movie is due out on May 25, 2018, and then Episode 9 will follow in May 2019. In 2.5 years, we’ll see three additional movies (with one on average every 10 months). It’s possible that there could be fatigued movie goers with all these Star Wars movies, but if Rogue One is the barometre, Cineplex will do very well.

Yet, an overreliance on Disney’s ability to deliver great Star Wars movies is a risky business. Cineplex recognizes this, which is why it has invested in a multitude of other projects.

One is its Rec Room, which is a network of large, multi-purpose locations. These are used during the day for corporate meetings and team building; then at night, families can visit. Unlike movies, which have a defined start and stop, people can visit the Rec Room for as long as they want. Cineplex opened its first in Edmonton back in September and will be launching one in Toronto and Calgary in 2017. All told, there are 10-15 planned locations over the coming years.

Another initiative is Cineplex’s investment in eSports. Cineplex acquired World Gaming last year and will host viewings of video game tournaments right in its theatres. Despite what you may think, millions of people like to watch other people play video games. And it can get quite competitive. By going this route, Cineplex can get people into its theatres without needing a blockbuster.

The final initiative I’m excited about is its media business. Not only do you see previews before the movie, but you see advertisements as well.

Cineplex Media saw revenue increase to $29.1 million from $25 million–a 16.2% year-over-year improvement. And since it already has the relationships with advertisers, it has started integrating its digital menu boards into Dairy Queen and A&W Canada, so customers see ads while ordering their food. This saw a 69.8% year-over-year improvement to $15.735 million in revenue.

Here’s my point: Star Wars is going to continue driving significant revenue to Cineplex, and I believe we are going to hear about a great fourth quarter thanks to Rogue One. However, thanks to a multitude of other initiatives, Cineplex is in a great position to shine even if Hollywood fails. That makes it a buy to me.

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. David Gardner owns shares of Walt Disney. The Motley Fool owns shares of Walt Disney. Walt Disney is a recommendation of Stock Advisor Canada.

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