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Why Cineplex Inc. Is Plummeting Today

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.

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Fool contributor Joseph Solitro has no position in any stocks mentioned. David Gardner owns shares of Amazon and Netflix. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of Amazon and Netflix.

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