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For Sale! This Stock Is Down 45% From All-Time Highs! Time to Buy or Bail?

Cineplex Inc. (TSX:CGX) stock has gone from trading at levels in excess of 40 times earnings to current levels in the low 20s price-to-earnings range.

That’s a big takedown of the stock by investors who are nervous about the future of the movie exhibition business.

At this point, however, the box office revenues at Cineplex are accounting for a decreasing percentage of total revenues, and the stock is discounting this risk.

In the latest quarter, the first quarter of 2018, box office and its related food revenue accounted for 74% of total revenue.

Yes, this is high, but given that the “other” segment, which includes businesses such as gaming, Cineplex media, and the Rec Room now represent 26% of total revenue, it is clear that management’s diversification strategy is paying off.

Not too long ago, box office revenue made up more than 80% of revenue, with the “other” segment represented well below 20%.

While the box office revenue is still a big portion of the total and it’s a low growth business, it is nonetheless a profitable, cash-generating business that is giving management needed funds for their diversification efforts, as well as for dividend payments to shareholders.

The dividend yield on the stock is currently 6%, a very attractive level. And while the company will continue to invest it in the business, it will continue to pass cash flow on to shareholders in the form of annual dividend increases.

The latest dividend increase was a 3.6% increase in the latest quarter, with the company continuing to balance growth spending with dividend increases.

In summary, I think it’s fair to say that Cineplex is a quality company with a strong national presence, good competitive positioning and advantage, a good track record of being strategically forward thinking and innovative, and a good track record of execution and returning money to shareholders as well as investing in the business.

With the “other” segment continuing to increase as a percentage of total revenue, we can see that Cineplex is slowly transforming into something more than just a movie exhibition company.

It is transforming into an entertainment company where consumers go for an experience, and whether it’s movie watching or gaming or Rec Room fun, it’s becoming a national entertainment brand.

While the company will continue to invest its cash flow into the business in the short- to medium-term, we are well aware of this, and the stock is reflecting this currently.

In short, the stock is now on sale, leaving investors the opportunity to get into a high-yielding dividend stock with good upside as its transformation continues to take hold.

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Fool contributor Karen Thomas has no position in any of the stocks mentioned.

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