The uncertainty is here again, and this time, the unfortunate victim is Cineplex Inc. (TSX:CGX), Canada’s largest movie theatre operator. I have been a perma-bull about Cineplex, and even I am questioning if we’re about to see the credits roll.
But it’s hard not to have doubts when the stock has given up 10% year to date and a third over the past 12 months. There’s been constant discussion about the merits of the movie theatre business.
Cineplex and theatres like it are highly dependent on the success of Hollywood. If there aren’t great blockbusters being released, theatre businesses are going to suffer.
But there’s also talk about whether the average person wants to go to the theatre versus just watching things at home on Netflix, Inc. It’s certainly a fair point, and I don’t assume to know what everyone else wants. But if the recent Black Panther launch shows anything, it’s obvious that people like going to the theatre.
In the fourth quarter, attendance was down from 17.9 million to 17.6 million year over year. Despite this, the company saw revenue rise because box office revenue per patron increased by 3% and concession revenue per patron increased by 9.4%. Nevertheless, you can only increase prices so much before attendance continues to drop even more.
But is it possible that we have it all wrong? Could it be that Cineplex is more than a theatre business?
CEO Ellis Jacob certainly thinks so. In an interview with Bloomberg, he said, “in three to five years, we could have three distinct businesses. People don’t realize how diversified we are as a company. Everybody’s treating us like the rest of the exhibitors.”
The three businesses are media, amusement businesses, and theatres. With full-year revenue coming in at $1.56 billion, media and amusement each accounted for 11%, so the remaining 78% was theatre. But Jacob believes that media and amusement could each be about a third in five years. That completely changes the landscape of the business.
One line of business that Cineplex continues to expand is The Rec Room. In Q1 2017, the two Rec Rooms brought in $4.1 million in food amusement revenues. In Q4 2017, The Rec Room contributed $16.9 million in revenue thanks to the addition of three new locations.
And on the media front, Cineplex generates revenue from advertising sales, which brought in $116.4 million in 2017 and place-based media, which is a network of digital menu boards that other brands hire Cineplex to make.
If we look at the company through the lens that Ellis Jacob does, you have a theatre business that has a consistent swath of Marvel and Star Wars movies to keep it humming, but it also growing media and amusement businesses.
Should we be looking at Cineplex as a true entertainment company instead of just a theatre company? And if so, does that change our investment thesis?
When investing in companies, sometimes the majority of people look at an investment differently than you do. And right now, the market has decided to punish Cineplex due to fears of Netflix taking over. But perhaps in a few years, we’ll look at Cineplex and see a very different creature.
Should you invest? A 5% yield is hard to pass up, but you have to be willing to stomach further drops, because they’re certainly a possibility.
