Could Walt Disney Co. Give Cineplex Inc. a New Hope?

Cineplex Inc. (TSX:CGX) shares are in limbo, but here’s why investors should be optimistic going forward.

| More on:

Cineplex Inc. (TSX:CGX) has been a go-to stock for many conservative income investors in the past. It did offer a rock-solid dividend to go with a great deal of capital gains, but the valuation was out of line, as I’ve emphasized in many of my previous pieces on Cineplex, before it took its nasty summer plunge.

The plunge was a huge wake-up call, not just for income investors, but for growth investors as well. The stock was priced like a high-flying growth stock, but the fact of the matter was, Cineplex was in the old-school movie-and-popcorn business, where there’s really little room to innovate beyond what the company has already done over the past few years. The growth ceiling was really low, and it inevitably hit it. The stock corrected following an absolutely abysmal earnings report.

So, was stagnant growth to blame? Or just a short-term industry-wide headwind of a lack of good movies for the summer? It was likely a combination of both. Not only does management need to adjust the company’s long-term growth profile, but it’s going to remain vulnerable to a lack of great movies that entice Canadians to leave their homes to see a movie.

As an avid movie-goer myself, I find that I haven’t been going to the movies as often, because there aren’t enough “must-see” films in theatres these days. Could it be that the best movies are going straight to stream?

Probably not, but I do believe the wide selection of older movies is keeping “avid movie-goers” (those who go to the movies often without a particular movie in mind) in couch-lock. Unfortunately, that’s a trend that’s here to stay, and Cineplex is going to need to diversify away from its movie business if it’s going to continue to be a growth name.

Walt Disney Co. (NYSE:DIS) to the rescue?

I believe the recent movie drought is a short-term issue, and once The Last Jedi is released, it’ll mark the end of the drought. Since it’s almost guaranteed that Canadians will flock to the theatres to see the next chapter of the epic trilogy.

Disney will be giving Cineplex a Christmas present pretty much every year for the next several years following the announcement that a new Star Wars trilogy will be coming with more spin-off movies that will be released in between. If Disney continues to release its movies in December, that’s a very good holiday season (Q4) for Cineplex shareholders for the foreseeable future.

Bottom line

Cineplex has done a great job of innovating and diversifying away from the movie business with recently announced initiatives. But it’s still going to be vulnerable to movie droughts in the future, and unfortunately, that’s out of management’s hands.

I believe Cineplex is on the right track to reignite its growth profile, and in the meantime, there are reasons to be optimistic about movies that will be coming to a theatre near you — especially since Disney appears to be going all-in with its Star Wars franchise. Who knows? One Star Wars movie a year may turn into two down the road. As a fan, I certainly wouldn’t mind! Neither would Cineplex shareholders!

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributorJoey Frenette owns shares of Walt Disney. David Gardner owns shares of Walt Disney. The Motley Fool owns shares of Walt Disney. Walt Disney is a recommendation of Stock Advisor Canada.

More on Investing