Whoever says you can’t have your large dividend and the ability to reap above-average stock price appreciation is just plain wrong, especially when it comes to battered, misunderstood names like Cineplex (TSX:CGX). Now, I was extremely bearish on Cineplex in 2017 before its shares fell off a cliff. I listed several reasons why the stock deserved a massive plunge and warned investors that the stock was severely overvalued and that a great deal of disappointment would be on the horizon. The stock eventually crashed, and investors rushed for the exits as the growth thesis caved in like a house of…
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Whoever says you can’t have your large dividend and the ability to reap above-average stock price appreciation is just plain wrong, especially when it comes to battered, misunderstood names like Cineplex (TSX:CGX).
Now, I was extremely bearish on Cineplex in 2017 before its shares fell off a cliff. I listed several reasons why the stock deserved a massive plunge and warned investors that the stock was severely overvalued and that a great deal of disappointment would be on the horizon. The stock eventually crashed, and investors rushed for the exits as the growth thesis caved in like a house of cards.
Cineplex struggled to get the same number of butts in its seats, as the box office blowouts weren’t happening. Fellow Fool contributor Will Ashworth noted that Hollywood droughts weren’t anything new and that the movie theatre business probably wasn’t headed for the graveyard any time soon at the hands of video streamers. I respectfully disagreed and claimed that Cineplex was on the receiving end of a profound technological shift that would see movie theatres become “the next drive-in movie.”
The good, old drive-in movie was a heck of an experience, and many of us miss it. Unfortunately, it became uneconomical, as “superior” alternatives came to be. Now, superior is a subjective term, but in aggregate, the consumer consensus was that such drive-ins weren’t as worth the money they used to be. As such, a majority of drive-in movie establishments could no longer survive in an environment that became uneconomical due to the intense rise in competition.
The video-streaming market is getting stronger by the day with many big companies throwing their money into the production of original titles meant for straight-to-stream. We all probably have a backlog of titles that we need to binge-watch at some point soon. Thus, unless we’re talking about a Star Wars film, your average box office title won’t be nearly enough to get us to go out to the local Cineplex to catch a movie on the big screen.
So, sadly, it does indeed look like movie theatres are the next drive-in. But unlike drive-ins, theatres aren’t going extinct. A handful of movie theatres may close their doors, but they’ll be replaced with something that consumers want. Cineplex is adapting to regain its prior glory.
From a top-down perspective, going against the grain by betting on a firm that’s on the receiving end of a secular trend is pretty reckless. But in five years from now, the box office segment is going to shrink to become a minority contributor to total revenues. Cineplex is turning into an experiential amusements company with new innovative offerings like Rec Room, Playdium, Topgolf, VR arcades, 4D cinemas, cosmic bowling, and many other amusements that have yet to be announced.
Of course, there will still be old-fashioned movie theatres; it’ll just be a single, smaller piece to the puzzle that is Cineplex: the entertainment company.
Millennials are all about experiences. Cineplex knows this, and they’re skating to where the puck is headed by pouring ample amounts of cash into the development of various amusement locations. Taking your date to dinner and a movie will become a thing of the past. Soon, it’ll be the arcade, bowling, a round of golf, maybe an indoor obstacle course, and a movie … if there’s time. And I wouldn’t at all be surprised if all these offerings are contained within the same building at some point down the road.
The movie theatre business may look to be dying, but it’s going to be gradual, and I don’t think it’ll face complete extinction.
The 5.2% yield is compelling, but investors are at odds with what kind of growth stock Cineplex is. Theatres, they’re dying, but the trailing P/E of 25 is indicative of a high-growth name with plenty of gas left in the tank.
Although Cineplex’s transformation will take a few years, I think the bountiful yield is more than enough to keep investors in the stock as the box office segment is diluted. Cineplex is a buy, here and now — not for the theatres, but for the new firm’s new trajectory.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.