The Motley Fool

Now Playing: Cineplex Inc. (TSX:CGX) Is on Sale, but Is it a Buy?

Dice engraved with the words buy and sell
Image source: Getty Images.

Cineplex Inc. (TSX:CGX) hit highs of over $50 back in June 2017, but since then the stock has been in a freefall.

In fact, the stock has tumbled 39% ever since amid rising capital expenditures and continued uncertainty about the movie exhibition business.

We are left now with a company that is seeing success in its diversification efforts and stock with a very attractive and well-funded dividend.

The dividend yield is currently in high-yield stock territory, at 5.36%, and the stock is very attractively valued. Let’s dig a little deeper and explore the reasons that Cineplex stock is a buy.

Dividend

As I mentioned, Cineplex stock has a dividend yield of 5.36%, so investors that buy the stock today get the benefit of an attractive income stream.

The payout ratio is a healthy 73%, and the 10-year compound annual growth rate of the dividend is almost 4%.

Strong brand

Cineplex enjoys somewhat of a monopoly in the theatre business, with 80% of the Canadian box office.

They have built themselves a moat, as barriers to entry are high for potential competitors. Cineplex has very strong relationships with the studios and continues to leverage these relationships. It also has a strong brand name and continues to leverage that as well.

And Cineplex is transforming itself into so much more than a movie exhibitioner.

It has emerged as a diversified entertainment and media company, with recreation rooms and digital media contributing an increasingly large portion of the company’s revenue.

Diversification

As we have seen again this most recent quarter, Cineplex continues to benefit from its strategies aimed at boosting revenue to combat stagnating attendance in the box office segment.

And Cineplex’s diversification strategy is paying off, as the company continues to increase revenue from the “other” category, which includes Cineplex media, recreation rooms and digital media.

In the latest quarter, the second quarter of 2018, the other category represented 24% of total revenue. This compares to well below 20% just a few years ago.

Cash flow

Cineplex is emerging from a period of intense investment, and the latest quarter has shown us the fruits of this investment.

The company’s adjusted EBITDA margin came in at 16.6% compared to 10.4% in the same period last year and free cash flow came in at $25 million compared to negative $80 million in the same quarter last year.

Valuation

The stock had been very richly valued when it was trading above $50, at 40 times earnings.

Today, valuation levels are far more reasonable, with the stock trading at 24 times this year’s earnings.

And with its solid dividend yield, its strong and improving cash flows, and the success of its diversification efforts, this stock is definitely one worth adding to your portfolio.

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.