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Cineplex Inc.: Is it Really Just a Rough Patch?

Here’s a question to kick off your Saturday morning philosophical meditation — Cineplex Inc.  (TSX:CGX): is it just a rough patch, or are the scary times just around the corner?

I’m going to dive into the “rough patch” narrative in an attempt to shed some light on what I believe to be a broader issue that Cineplex’s management team is attempting to dissuade investors from considering. After all, choosing to believe that the sector your company relies on is truly in cyclical decline can lead to a very deep rabbit hole, and narrative is everything when it comes to reassuring investors and keeping those stock options relevant.

On conference calls, the go-to explanation for many companies for missing earnings can be anything, really. Whether it is “the weather,” or “the Fed,” or “Justin Trudeau’s socks,” there is always some larger outside force to blame that a company has no control over. While outside influences certainly affect companies, and often in material ways, I’m starting to get suspicious of the argument that “bad movie slates” are really the root of the underlying problem at Cineplex.

Signaling to the market that this short-term turmoil may be “just a blip” can also be reflected in the fact that Cineplex’s management team has chosen to not only keep its very high dividend distribution, but raise it. The audacity for Cineplex’s management team to raise its already extremely high dividend distribution post-Q1 earnings another 3.6% to $1.74 per share (annualized) has resulted in a yield which has hovered around 6%, making many income investors very excited.

The reality for the movie theatre sector, however, is one which involves a macro shift the likes of which this industry has only begun to experience; I would equate such a shift to the likes of the e-commerce revolution changing the way buyers shop for goods that were previously sold in brick-and-mortar locations. This is a shift that, I believe, will dramatically affect brick-and-mortar theatres at expense of the household home theatre supplied by streaming services, which continue to improve, bolstered by ever-increasing budgets, which I argue are likely to rival those of Hollywood in the long term.

The game is far from over, and I believe Cineplex has an opportunity to invest heavily in its streaming platform (which is currently immaterial) and other virtual solutions to stem the losses it is likely to see from continued declines in theatre attendance. Until it does so, I don’t see the “rough patch” abating in the long run.

Stay Foolish, my friends.

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Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

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