Cineplex (TSX:CGX) Could Have a Massive Third Quarter If Its Cinemas Open

Cineplex Inc. (TSX:CGX) could have big upside as it reopens the door to all of its locations, but should you be a buyer amid this unprecedented crisis?

| More on:
Modern buildings in business district

Image source: Getty Images

Cineplex (TSX:CGX) stock surged 11% in a single trading session on Thursday on news that all 164 of the firm’s theatres will be opening across the country. In the second quarter, revenues nosedived 95% to a meagre $22 million.

With the doors set to open across all Cineplex locations, the top line could have the potential to surge, as Canadians longing for a sense of normalcy return to the cinema to catch their favourite flicks that have been delayed non-stop. Christopher Nolan’s widely anticipated film Tenet is likely to draw major crowds across cinemas in localities that have gotten COVID-19 under control.

Similarly, Russel Crowe’s latest film Unhinged and SpongeBob: Sponge on the Run films could help provide Cineplex will the top-line relief it so desperately needs at this juncture.

Of course, there’s a real risk that Cineplex may be reopening all its locations too soon. The company has been under an unfathomable amount of pressure lately, and if the company can’t recover at least half of its top line soon, the risk of insolvency goes up by the day, making Cineplex a potentially dangerous speculation that could go either way.

A big top-line boost could be on the way for Cineplex

Fortunately, there’s a stacked lineup of must-see summer films that have been piling up in the first half. Canadians will finally have a chance to catch big-budget box office hits. With more than enough time to ramp up on safety procedures, Cineplex has an opportunity to reopen correctly and get things back in the right direction.

The company is reportedly opening its doors with “enhanced safety and cleaning measures” in addition to strict protocols that will “allow for physical distancing both inside and outside” theatres.

Cineplex is cheap, but are the insolvency risks too great?

At the time of writing, Cineplex stock looks dirt-cheap at 1.7 times book value. The Friday reopening of Cineplex locations, I think, could have the potential to be a major needle mover on the stock, as coming quarters could have unprecedented quarter-over-quarter growth.

Of course, a resurgence in COVID-19 cases could spark a reopening rollback that could shutter many Cineplex locations once again, possibly for the duration of this pandemic. Moreover, if COVID-19 cases are reported at one or more Cineplex locations, it’ll become that much harder for the firm to get bums back in seats, no matter how safe the company makes its customers feel at its locations.

Unless you’re willing to lose your shirt with an all-or-nothing-type gamble, I wouldn’t do anything as silly as investing a huge chunk of your wealth in Cineplex, even with shares trading at a mere $9 and change. There are far too many risks involved with the name and a lot of things that could go wrong with the reopening of its locations.

Foolish takeaway

While I think the worst is in the rear-view mirror for Cineplex, there’s still a real risk that reopening rollbacks could keep the company’s revenues depressed for a longer duration of time. The COVID-19 pandemic isn’t over yet, and if it worsens, Cineplex stock could have much farther to fall.

That said, Cineplex has a tonne of upside going into year-end for those who are bullish on the timely advent of a coronavirus vaccine or think the Canadian economy can remain mostly open without having to return to shutdowns to contain a potential second wave.

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 Joey Frenette has no position in any of the stocks mentioned.

More on Stocks for Beginners

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Stocks for Beginners

3 TFSA Hacks That Could Make You a Millionaire

Do you want a $1 million without worrying about the tax bill? These TFSA hacks could help you become a…

Read more »

Early retirement handwritten in a note
Stocks for Beginners

These 2 TSX Growth Stocks Could Help You Retire Early

Buying these two TSX growth stocks can help you retire early by multiplying hard-earned savings in the long run.

Read more »

Technology
Stocks for Beginners

The Best Stocks to Invest $1,000 in Right Now

Want a great starter portfolio? Here’s a list of the best stocks to invest $1,000 in right now for long-term…

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »