Contrarian investors are always looking for the next opportunity to profit from overdone negative sentiment on a stock.
Cineplex Inc. (TSX:CGX) has been one of those stocks that have dropped off the face of the favourite stocks list and has increasingly become one to avoid.
Trading more than 50% lower than its 2017 highs, Cineplex has gone from an investor favourite to a stock to “avoid” in investors eyes.
This in only two years.
So what’s changed?
Not that much really, because even back then, when investors loved this stock, we knew the threats that Cineplex’s movie exhibition business was facing, as evidenced by the fact that it was in those years that the company ramped up its spending on its diversification efforts.
This increased spending was necessary for the company to combat the threats to its business from the likes of Netflix in what is quickly becoming one of the biggest disruptions of our time, but it was this that drove the stock down.
What strikes me is that when the stock was trading at pretty lofty valuations (as high as 40 times earnings), its “other” revenue segment, which includes amusement and Cineplex media, represented well below 20% of total revenue versus today’s 26%.
Today, the stock is trading at a P/E ratio of roughly 23 times earnings.
Dividend boost
With the quarterly release, management took the opportunity to boost its dividend in a move that goes contrary to what many investors were thinking.
The annual dividend was increased by 3% and now stands at $1.80 per share in a move that reflects management confidence in its future.
Positive fundamentals
First, Avengers Endgame, which has smashed box office records this month, speaks to a strong upcoming second quarter result.
Second, we have the strong performance out of the amusement segment in the first quarter, with revenue up 17.4% to $50.5 million, and the media segment up 7.7%.
While attendance in the first quarter was weak, down 15%, we can see how the “other” category brings to Cineplex another much-needed driver of growth, and ultimately, diversification — as per the company’s plans.
So we have short and long-term drivers for the stock playing into a positive investment thesis at this time.
Final thoughts
Cineplex stock offers investors a well-covered and growing dividend, a current dividend yield of 7%, and a stock that’s showing real value.
It’s trading at a price-to-earnings ratio of 19 times this year’s consensus earnings and 17 times next year’s consensus earnings. This compares to the 40 times multiple that it was trading at back in 2017.
