4 Major Reasons Why Cineplex Inc. Has Farther to Fall

Cineplex Inc. (TSX:CGX) is stumbling. Here’s why investors should steer clear at $30.

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Last summer, I called the correction in Cineplex Inc. (TSX:CGX) stock in a pretty timely fashion. I admit that I didn’t expect shares to crash so fast so soon, as many of the headwinds I noted were long-term in nature.

Today, Cineplex is down 43% from its high and unfortunately, many conservative income investors got burned from what appeared to be a rather stable income-paying firm with a utility-like cash flow stream.

Before you think about going bottom fishing for the 5.6% dividend yield, you should know that the company is nowhere near out of the woods yet. Although generic entertainment diversification efforts have shown promise, Cineplex remains at the mercy of Hollywood and will continue to be at least over the next few years.

Here are four reasons why I’m still avoiding Cineplex at $30 per share.

Video streaming pressures have just begun

Netflix Inc. (NASDAQ:NFLX) and the rise of the “stay-at-home” economy are mostly to blame for the rapid demise of movie theatre firms like Cineplex. Although it appears that the rise of video streamers headwind is already baked into shares and then some after the recent crash, I think the pressures are about to become even worse as the video streaming market becomes even more crowded and as more firms move in with the intention of one-upping one another by doubling-down on exclusive content.

As the video streaming market becomes more competitive, I expect that each streamers’ content budgets will continue to soar, providing the stay-at-homers with even less of an incentive to go out and see a movie as more big-budget straight-to-stream films like Netflix’s Tau begin to replace theatrical releases in the lists of most anticipated films.

Moreover, many of us already have a backlog filled with movies that we’re intending to watch, so unless there’s an epic blockbuster production from Christopher Nolan, it’s more convenient and budget-conscious to just stay home. Consumers clearly want more quality content from streamers and they’re going to get just that.

Hyped big-budget Hollywood productions are no longer a guarantee of box office success

Big-budget box office flops are starting to become the norm now. Thus analyst projections of how a lineup of films will fair at the box office are now akin to throwing darts at a board while blindfolded.

Consider Solo: A Star Wars Story, which disappointed at the box office in spite of the fact that Star Wars, though the powers of the force, seemed to have the ability to get people in theatre seats. Solo wasn’t a horrible movie either, as critic reviews were by no means indicative of a bust.

A failure to cater to millennials’ affinity for health-conscious food options

Cineplex is also going against the grain with its high-margin concession business.

Consumers, especially millennials, favour healthier food options, so naturally, they’ve turned away from $15 lard-covered popcorn, candy and soda combos. The VIP cinema experience, which has shown promise in the past, appears to be losing its appeal as the food offerings (wings, calamari, alcohol, etc.) aren’t exactly foods you’d consider “healthy” options.

The stock remains too expensive

With Cineplex shares trading at over 31 times trailing earnings, the stock remains far too rich, even after the massive correction.

Moving forward, management is going to attempt to alleviate pressures in its box office and concession segments. However, I believe efforts (like monthly moviegoer passes) will do little to nothing to offset the serious headwinds that will likely drive the stock down to much lower levels.

Diversification efforts remain key if Cineplex is to ever become great again. Unfortunately, it’s going to take years before the box office segment can be diluted enough such that the stock will become worthy of the handsome growth multiple it has now.

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 contributor Joey Frenette has no position in any of the stocks mentioned. David Gardner owns shares of Netflix. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of Netflix.

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