Cineplex Inc. (TSX: CGX), one of Canada’s leading entertainment and media companies and its largest owner and operator of movie theatres, announced its second-quarter earnings results this morning, and its stock has responded by falling over 10% in early trading. Let’s take a closer look at the earnings release and the condition of the industry to determine if we should use this sharp decline as a buying opportunity or a major warning sign.
The results that failed to impress the market
Here’s a breakdown of 10 of the most notable statistics from Cineplex’s three-month period ended on June 30, 2017, compared with the same period in 2016:
| Metric | Q2 2017 | Q2 2016 | Change |
| Total revenues | $364.08 million | $338.03 million | 7.7% |
| Net income | $1.38 million | $7.21 million | (80.9%) |
| Earnings per share – diluted | $0.02 | $0.12 | (83.3%) |
| Adjusted EBITDA | $38.1 million | $42.8 million | (11%) |
| Adjusted EBITDA margin | 10.5% | 12.7% | (220 basis points) |
| Adjusted free cash flow (FCF) | $18.01 million | $25.55 million | (29.5%) |
| Adjusted FCF per share | $0.283 | $0.403 | (29.8%) |
| Box office revenues per patron | $10.36 | $9.89 | 4.8% |
| Concession revenues per patron | $6.03 | $5.74 | 5.1% |
| Attendance | 16.5 million | 16.9 million | (2.2%) |
What should you do with Cineplex now?
It was a very weak quarter overall for Cineplex, and it capped off a tough first half of the year for the company, in which its attendance decreased 3.6%, its net income decreased 15.1%, and its adjusted EBITDA decreased 2.4% compared with the year-ago period. It’s unlikely that the industry will recover in the second half of the year either. Last night, AMC Entertainment Holdings Inc. (NYSE: AMC), the world’s largest owner and operator of movie theatres, provided very weak guidance for its second quarter and went on to state that it anticipates a “very challenging third quarter.”
The movie theatre industry has been under immense pressure as streaming companies like Netflix, Amazon Instant Video, and Hulu have continued to change consumers’ habits, and I think this pressure will only intensify in the years ahead. Also, there has been talk that movie studios have been exploring the option of offering in-home movies to consumers as early as a couple weeks after theatrical releases, which I think would cripple movie theatre operators.
With all of this being said, I would hold off on investing in Cineplex today and only revisit the idea of an investment if the industry takes a turn for the better in 2018.
