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Is Cineplex (TSX:CGX) a Buy After Its Sharp Decline?

Ouch, this hurts.

Cineplex Inc. (TSX:CGX) stock has plummeted more than 28% since its earnings release on November 13.

This despite box office results that showed notable strength in theatre attendance — a 2.6% increase. Year-to-date attendance is down 1.1%.

But the fact that the market is ignoring this strength is understandable, because investors have been relying on Cineplex’s diversification strategy in order to offset a movie exhibition business that the market deems is in a long-term decline mode, even though Cineplex results have thus far proven that this may not be as sharp as expected.

While the growth in the movie exhibition business is slowing, it is not necessarily going away anytime soon, if at all.

And it has been a cash cow for Cineplex, and has aided in the company’s diversification strategy through cash generated from the business and from brand awareness and strength that stems from it.

The stock has been declining for a while now, ever since June 2017 when it hit highs of over $50.

Now trading at $26.05, with a dividend yield of 6.68%, it may be the right time to start buying the shares for its value, its dividend yield, and its upside potential.

Although I realize I’ve said this before, at least we have had the dividend to comfort us when the stock has gone down.

Cash flows are strong, the balance sheet is strong, and Cineplex’s diversification strategy is progressing very well.

Year-to-date free cash flow increased 20% to $119 million and its net debt to EBITDA ratio is 2.4 times.

Other revenue represented a full 25% of total revenue, and although there was weakness in Cineplex media, which offers customers out-of-home advertising opportunities such as on, and in the pre-show at the theatre, this weakness is believed to be a one-off thing that does not alter the long-term growth trajectory of the segment.

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

So Cineplex stock currently offers investors strong cash flows, a steady anchor in the movie exhibition business, and a fast-growing presence in the lucrative e-gaming world.

Given the company’s increasing diversification, its strong cash flows and growing presence in the e-gaming world, this entertainment stock is increasingly well-positioned to capture the entertainment needs of the young and old, the millennials, and the baby boomers.

In difficult economic times, spending on entertainment needs may be more resilient than we would expect given the “feel good” effects.

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

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