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Cineplex Inc.: Does a Strong Quarter Warrant a Buy?

In the beginning of May, Cineplex Inc.  (TSX:CGX) announced its quarterly results and, for the most part, they were strong. The quarter also showed Cineplex’s diversification strategy working; other parts of the business are boosting revenue and adding income to the bottom line.

In the first quarter, Cineplex had $394.2 million in revenue — up 4% from Q1 2016. This is significant because box office revenue dropped a bit to $195.4 million. The company’s excuse for the drop in revenue is because of “a tough comparator in the prior year period.” Essentially, it is saying that Q1 2016 was a particularly strong quarter, making it hard to beat. And in many respects, this is true; Star Wars: The Force Awakens was included in Q1 revenue.

But despite this, the box office revenue per patron actually increased by 3% to $9.97. Food service increased by 1.7% to $113.9 million, media revenue increased by 2.6% to a record $33.9 million, and amusement revenue increased by 58.9% to $41.4 million. Amusement revenue had such a boost because of the acquisitions of Tricorp Amusements and SAW LLC which completed in 2016. I expect the amusement division to continue providing strong revenue for the company.

All of this shows that even when Cineplex doesn’t have an immensely powerful film like The Force Awakens to draw users in, it can still continue growing its revenue, which really is an important factor. When I originally began researching Cineplex, my primary concern was that it would be difficult to consistently grow because of the company’s dependence on Hollywood to succeed. However, now that there are diversified revenue sources, I am less concerned about this.

One business I believe will help Cineplex significantly is the Rec Room initiative. According to the Q1 results, this brought in $2.1 million in food revenue and $2 million in amusement revenue. The Rec Room is basically a massive multi-purpose location that has restaurants, gaming, and other activities for businesses and families to use day and night. Unlike a movie theatre, which needs Hollywood to succeed, these are independent of a movie catalyst. There are three more Rec Rooms currently in construction which should launch in 2017, so the impact on revenue should continue to grow.

Another business that I see having an impact is the company’s media and digital arms. Thanks to sponsorships associated with its eSports business, Cineplex continues to boost its media revenues. The digital arm continues to build its customer base for digital signage. Although it’s a smaller piece of the pie, the business provides recurring income for Cineplex, which offers a semblance of predictability to cash flow.

But what really makes Cineplex quite an appealing opportunity is that it is secretly a great dividend stock. Along with its quarterly results, management announced that it is increasing the dividend by 3.7% to $1.68 per year. This is good for a 3.09% yield. And Cineplex’s dividend is paid monthly. Being able to take that income and reinvest it monthly rather than quarterly allows for quick compounding effects.

I believe Cineplex is a great business, and the numbers support that. Even without a movie as strong as The Force Awakens, it still was able to boost its revenue. And as income rises, so too does the dividend.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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