Cineplex Inc. Finishes Tough Year in Good Shape

You can’t run before you walk.

Cineplex Inc. (TSX:CGX) reported fourth-quarter earnings February 22 before the markets opened; they were a breath of fresh air for a company that took it on the chin in fiscal 2017.

While the results in Q4 2017 were reasonably good, a lot of skepticism remains, which meant its share price took a hit on the day’s trading despite delivering higher revenues and profits.

I see the glass as half full

Unlike my colleague, Joey Frenette, who believes investors will continue to abandon Cineplex’s stock because the company is in the grips of a secular decline, I see it taking a step back regarding both revenues and earnings in fiscal 2017 as a natural part of its business.

It’s not fun, but it happens; you’ve got to roll with the punches, which is precisely what CEO Ellis Jacob is doing.

I’m usually not a fan of investor-relations websites because they tend to be either very dry or too rah-rah, but Cineplex manages to strike a delicate balance with quotes from both Jacob and CFO Gord Nelson on the company’s website that are meant to reassure investors that all is well despite the setbacks.

“While exhibition remains our core business, we continue to innovate and diversify our revenue streams outside of traditional exhibition,” states Jacob.

The skeptics seem to think that the CEO is sitting around doing nothing to solve its revenue and earnings shortfall, but the moves made over the last few years provide irrefutable evidence to the contrary.

Just a week ago, Bob McCown, the top-rated host of the Sportsnet 590 radio program, Prime Time Sports, was talking about how great Topgolf is. Although he was talking specifically about the experiential golf and hospitality brand’s Las Vegas location, Cineplex has the rights to develop Topgolf in Canada and should do an excellent job adding locations north of the border.

So, he’s doing anything but sitting still.

Financially sound

It’s hard to dig yourself out of a hole without a little money in the bank and a good reputation with your bankers. Cineplex has both.

“Our financial discipline is what enables us to continue to deliver a strong balance sheet with low financial leverage, sustainable cash flow, and the ability to invest in new revenue generating activities and strategic acquisitions as they arise,” Nelson said.

That might seem like corporate speak, but financial discipline is essential when trying to add revenue streams to your core business. Frenette believes that if the company doesn’t acquire a company in 2018, it’s unlikely to revive its share price.

That’s where financial discipline comes into play.

A veteran CEO like Jacob is not going to approve an acquisition just for the sake of momentarily boosting its share price; he’s looking for businesses that can make Cineplex a better entertainment company over the next 5 to 10 years, not just over the next 5 to 10 months.

Its latest results demonstrate that business is getting better despite a 2.1% drop in fourth-quarter attendance.

Specifically, revenues and net income increased by 11% and 24%, respectively, in the fourth quarter on the back of a 9% increase in concession revenue per patron to a record $6.29 along with a 21-cent increase in the box office revenue per patron to $10.54.

Given the 2.1% drop in attendance, you don’t do that without financial discipline.

Bottom line on CGX stock

I mentioned in a previous article that Cineplex is going to look very different in 2022 than it does today. The severe correction in Cineplex provides the smart investor with a significant buying opportunity.

In 2017, Cineplex’s adjusted free cash flow, at $151 million, was only 3.4% than it was in 2016. Yet its stock lost 35% of its value. At the end of 2016, CGX had a free cash flow yield of 4.3%; today, it’s at 6.0%.

Value investors consider anything over 8% to be a potential value play. More important, free cash flow is what the company uses to pay out its dividend that yields a healthy 5.3%.

It appears that Cineplex is about to go from walking to running.

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Fool contributor Will Ashworth has no position in any stocks mentioned. 


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