In many of my previous pieces this past year, I’ve warned investors that Cineplex Inc. (TSX:CGX) would suffer a correction because of industry-wide headwinds in addition to a lack of meaningful growth prospects and an absurd valuation. Shares of CGX took a ~34% plunge this summer, and the stock now looks like a terrific income play with its fat 4.3% dividend yield, which is pretty much a whole 1% higher than it normally is.
Cineplex is a great business for what it is — a low-growth stalwart. The movie and popcorn business has little to no room for growth, and that’s why the stock took such a nosedive. Cineplex had the valuation of a high-flying growth stock, even though there was no real growth to be had.
Today, Cineplex appears to be a value stock that prudent investors may want to consider buying on the way down. Although the stock of CGX has a hefty price-to-earnings multiple of 33.2, it has a price-to-book multiple of 3.4 and a price-to-sales multiple of 1.6, both of which are lower than the company’s five-year historical average multiples of 3.6 and 2.1, respectively.
Although CGX is cheaper, I still think the stock is fairly valued at best. The current valuation implies there’s still growth left in the tank, which may be the case if Cineplex is able to successfully steer away from the movie and concession business and into the general entertainment space.
Cineplex is doubling down on entertainment
Cineplex is reinventing itself as the go-to place for date night or just hanging out with friends. The company partnered with Topgolf and doubled down on Playdium, which is described as a “tech-infused place to play that offers the best games and attractions for everyone.” Think of it as a Chuck E. Cheese for millennials and teenagers or an arcade on steroids.
About 15 Playdium locations will be opened across Canada, the first of which will open in Ontario in the latter part of 2018.
For Cineplex, the transition to general entertainment has already begun. Box office and concession numbers for Cineplex have been accounting for less of total revenues over the past few years. In 2011, box office and concession segments accounted for ~58% and ~29.2% of revenues, respectively. Compare these numbers to box office and concession segments in 2016, which accounted for ~48.2% and ~28.7% of revenues, respectively.
Going forward, it’s expected that box office numbers will account for even less of Cineplex’s revenue as it finds new ways to diversify its revenue stream through various different entertainment offerings.
Bottom line
There’s still growth left in the tank, but not in the movie and concession segments, but in the general entertainment space. It’s going to take some time for Cineplex to diversify to other segments, but over the next few years, I believe Cineplex — the entertainment company — will be a fantastic high-yield growth play, like it was a few years ago when the stock roared upward.
If you have the patience to stick with Cineplex as it undergoes its transition, then now may be the time to load up on shares. Growth won’t be reinvigorated in the near term; however, over the long term, I believe the company will be successful with its new growth strategy. Buy the stock, be patient, and collect that bountiful 4.3% while you wait.
Stay smart. Stay hungry. Stay Foolish.
