Beauty and the Beast reportedly broke records for the biggest opening for a PG-rated film. Will this be enough support for Cineplex Inc. (TSX:CGX) at a time when its shares are stuck? Shares are suffering from valuations that are too lofty.
The movie earned $170 million at the box office this past weekend — a number that surely has Walt Disney Co celebrating, along with movie exhibitioners such as Cineplex. For comparison purposes, Finding Dory had the second-biggest opening weekend for a PG-movie at $135 million.
While this is definitely a good thing for Cineplex, the question is, is it enough to save the stock from what I think will be short-term weakness as the company faces various challenges?
First off, let’s review another record-breaking opening weekend for a movie. That was back in December 2015; Star Wars: The Force Awakens brought in almost $250 million in its opening weekend. And Cineplex’s 2015 fourth-quarter results were, not surprisingly, strong, with revenues up almost 14% and box office attendance up 7.1%. So, while we can expect the strong box office for Beauty and the Beast to show in Cineplex’s results, there is more to consider.
To put this into perspective, let’s recall that box office accounts for 46% of revenue, food service accounts for 27.4% of revenue, and the other segment, which includes businesses such as gaming, Cineplex media, and the Rec Room, accounts for 26.6% of revenue.
So, while good box office results are still very positive for Cineplex, they are not the full story. And this is a good thing, as diversification has and will continue to move Cineplex away from “Hollywood” revenue, which is a very good cash flow business, but it leaves the company at the mercy of the big Hollywood companies and hoping for the next big blockbuster.
So, Cineplex is clearly delivering on its goal to diversify away from its mature “Hollywood” movie exhibition revenue, towards faster-growing businesses.
Compounding this, I also think that the valuation of the stock will not allow it to move higher much in reaction to these strong box office results. The shares trade at 40 times 2016 EPS and 28 times this year’s expected earnings, which seem high to me considering the growth rates in the business and the amount of investment that the company will continue to make this year in its diversification efforts.
To be clear, I still think this is a great company with long-term attractiveness. For those investors who already own the shares, holding on for the 3.23% dividend yield is a safe bet. But for those of us who do not own the shares, I think there will be a better time in the future to get into them.
