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Here’s How the Growth Will Return at Cineplex Inc.

Cineplex Inc. (TSX:CGX) shares have a mouth-watering dividend yield of 4.4%, which is close to the highest it’s ever been, but should investors pick up shares after the sharp ~33% peak-to-trough plunge, which happened this summer following an underwhelming lineup of films?

The downfall of 2017

In many previous pieces, I’ve urged investors to dump their CGX shares because of various industry-wide headwinds in addition to the stock’s ridiculous valuation, which made no sense, especially considering there’s only so much growth that could be had from such an old-fashioned business.

Cineplex has done a fantastic job of reinventing the movie-going experience over the last several years, but it eventually hit a brick wall, as it ran out of ways to spark growth. An underwhelming lineup of summer movies certainly didn’t help Cineplex’s Q2 2017 net income, which plunged by ~81%.

Unfortunately, there was only so much that Cineplex could do to boost numbers from its box office and concession segment. And, unfortunately, we’re entering an age where the stay-at-home entertainment is the best it’s ever been. You could pretty much watch any movie your heart desires from the comfort of your own home, so there had better be a good reason to get Canadians out of the house.

Looking into the future

A few months after the disastrous Q2, it appears that the dust has settled; however, even after the plunge, the valuation is still steep and appears to still be indicative of a growth stock. There’s no question that growth is deteriorating, but still, management is focusing its efforts on initiatives to reignite growth.

Cineplex is reinventing itself, not as a film exhibitor, but as an entertainment company with non-movie related forms of entertainment, including arcades, restaurants, Rec Rooms, Topgolf, and other amusements.

It’s not a mystery that Cineplex has been moving away from the movie-and-popcorn business model for quite some time now. The box office segment accounts for significantly less of total revenue today than it did five years ago, and going forward, this is a trend that’s expected to accelerate if Cineplex is going to continue to be successful moving forward.

Is Cineplex channeling Chuck E. Cheese?

Cineplex recently doubled down on arcades when it announced its plans to re-launch and rollout Playdium locations across the country starting in late 2018. You may be familiar with the old Playdium; it was an arcade on steroids that young people in the vicinity flocked to.

The new Playdium is going to be even better. There aren’t just arcades; there’s bowling, climbing walls, laser tag, and rope courses. There’s also a dining area where guests can order food. It sounds like a Chuck E. Cheese for adults!

Personally, as a regular Playdium-goer back in the old days, I’m extremely excited for the reboot, and I believe the 10-15 new facilities will be major hits that could reinvigorate Cineplex’s stale growth profile.

Bottom line

While there are many reasons to be optimistic about Cineplex’s new growth trajectory, it’s important to note that Playdium won’t really make a meaningful impact on the bottom line until a few years from now. The first Playdium is opening in the latter part of 2018, and as many as 14 others will be opening across the country as well. If the new Playdiums are a success, then more openings will likely be announced, and shares of CGX could surge.

As Cineplex attempts to spread fun across the country, I believe the stock will eventually rebound out of the gutter; however, you’ll need to be patient to ride the rebound, which may be at least a year away. In the meantime, you can look forward to collecting that fat 4.4% dividend yield.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

 

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