It has been a rough year for Cineplex (TSX:CGX) shareholders. It took the majority of the year to recover after a dip early in the year, and the company’s stock price was sent crashing again following third quarter results. Year-to-date, Cineplex has lost 33% of its value and is one of the worst performing Canadian Dividend Aristocrats. An Aristocrat is a company with a dividend growth streak of at least five years.
So what’s the issue? The most recent dip was a result of a big miss on earnings. The company’s media segment was a drag on profits as its theatrical advertising took a hit.
The Ontario government, which was a big buyer of advertisements, cut back significantly on its advertising. As a result, cinema revenue dropped 26% over the previous year. Compounding the issue, there was an $8.4 million increase in share-based compensation due to the company’s strong performance the previous quarter.
Now that the third quarter is in the rear view mirror and the company is trading at 52-week lows, is now the time to buy?
If recent insider buying is any indication, the answer is a resounding yes. Chief Operating Officer Dan McGrath and Chief Financial Officer Gord Nelson both took advantage of the most recent dip to scoop up shares on the open market. McGrath bought 4,000 shares at a price of 25.65 for a total investment of $102,600. Nelson invested $51,960 in the company by picking up 2,000 shares at a price of $25.98. As of writing, Cineplex is trading at $25.22, below these values.
In Chief Executive Officer’s Ellis Jacobs own words, “You miss one quarter and they think the whole world’s coming to an end, like happened last year with the movie business.” It’s a good sign when management is confident enough to buy shares on the open market. Another good sign? There hasn’t been a single insider sell on the open market over the past six months, not even when the share price hit yearly highs.
Selling has been overdone
The company is also oversold on a technical basis. The company’s 14-day relative strength index (RSI) is currently at 29. An RSI below 30 indicates that the company is oversold and is due for a technical rebound.
The box office has rebounded after a dismal 2017 and is on pace for a record year. Next year, there is a new Avengers and Star Wars movie along with a slate of other high-profile films. Just as the death of the film industry caused Cineplex’s share price to over-correct, so too have third quarter results.
Cineplex has a monopoly in Canada and is well positioned to take advantage of a strong 2019 film slate. Insiders are investing the company, and although analysts have lowered fiscal 2018 results, they are still bullish. Seven of the 10 analysts covering the company rate it a buy with an average one-year price target of $35.10, almost 40% upside from today’s share price. There has been no better entry point than right now.
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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 Mat Litalien is long Cineplex Inc.