The Motley Fool

Cineplex Inc. Continues its Push into U.S. Gaming

Cineplex Inc. (TSX:CGX) recently announced the acquisition of Dandy Amusements International, a leading amusement gaming machine operator in the western United States. With revenue of US$15 million and adjusted EBITDA of just over US$3 million, it is clearly not a big acquisition. Yet it represents 10% of the company’s quarterly games revenue. Its importance lies in the fact that Cineplex is building its gaming business and is building up scale and presence, so it can go to the next level.

In the fourth quarter of 2016, the games segment revenue increased 33.9% versus last year due to acquisitions. Box office revenue and food service revenue both declined by 9.6% and 7.3%, respectively, highlighting the importance of Cineplex’s strategy to diversify into other businesses, such as the gaming business.

As of the last quarter, the box office accounted for 46% of revenue, food service accounted for 27.4% of revenue, and the “other” segment, which includes businesses such as gaming, Cineplex media, and the Rec Room, accounted for 26.6% of revenue. So, the company is clearly delivering on its goal to diversify away from its mature “Hollywood” movie-exhibition revenue towards faster-growing businesses.

But this diversification initiative requires investment, and the company is seeing the negative effects of this, as operating costs for the “other” segment increased 3% year over year. Also, film costs and the costs in the food service segment both increased by approximately one percentage point each. In the fourth quarter of 2016, the company saw EBITDA margins fall to 17.3% from 20.9% — a decline in net income and cash flow from operations.

Looking at the long-term history, the company has been a steady performer, as evidenced by the continued dividend hikes, strong cash flow, and revenue numbers. Cineplex has increased its dividend 28.5% since 2010, and in its latest quarter, it instituted a 3.8% increase in its annual dividend to $1.62. Revenue has increased almost 35% since 2012.

In my view, the company’s strategy has been very forward thinking and effective, but it is currently going through the growing pains of its diversification strategy, which means greater investment in the business, lower margins, and greater uncertainty. So, while I believe the company will, in the end, come out ahead, I also think that investors should be in no hurry to own these shares, as there will be a better time in the future to establish a position.

In the meantime, Cineplex shares still pay out a pretty decent 3.22% dividend yield.

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Fool contributor Karen Thomas has no position in any stocks mentioned.

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