It seems like investors are quite excited about Cineplex’s (TSX:CGX) quarterly earnings next week. At least the stock implies that. This year, it has gained more than 25% and is currently trading close to eight-month high levels. But is the excitement rational or irrational will get clear next week.
Cineplex to announce Q4 results next week
Cineplex plans to release its fourth-quarter 2020 earnings on February 11. A $700 million theatre operating company was at the receiving end in 2020. The company reported a massive 90% fall in revenues against the 2019 period during the pandemic-driven lockdowns. To investors’ dismay, such a steep dent pulled its stock down by 70% last year.
For Q4 2020 as well, things won’t be much different, at least on the financials side. The revenue and earnings will likely take a similar beating. It’s been a couple of months since the vaccine launch. CGX stock notably rallied then on the hopes of normalcy. However, despite aggressive vaccination efforts, the virus mutation has added to the woes. The mobility restrictions even tightened, which delayed rejoicing for Cineplex and its investors.
Cash position will be critical to watch
One important thing to watch in its earnings will be the liquidity position. Cineplex’s liquidity position has substantially weakened in the last three quarters. At the end of the third quarter of 2020, it had a cash balance of almost $13 million.
It announced the sale of its head office building in Toronto late last year to raise cash. Cineplex received interim relief from creditors that agreed to push back $460 million repayments to Q2 2021. Even though that was a positive development for the short term, it indicates a company’s grave cash position. A better-than-expected cash position and more leeway from creditors could be great news for Cineplex investors.
The management commentary will also be crucial for investors. How the company sees traversing 2021 will be important to watch. Any remarks on the re-opening front, as well as any timeline for the blockbuster movie releases, should drive the stock in the short term.
What should Cineplex investors do?
It totally depends on your risk-taking abilities and return requirements. I think the stock is a speculative play and could be highly volatile for some more months.
CGX stock looks overvalued after its recent rally. It is trading at a price-to-book value ratio of close to three times and hints at a pullback. However, we might see the exuberance in CGX stock continuing in the next week. It will be interesting to see where the stock lands after its Q4 2020 results.
Even if the stock has shown some revival since the vaccine launch, the long-lasting recovery could take time. Vaccine reaching a large portion of the population and return of movie-goers could take even longer. Outliving till then on such a cash position will be challenging for Cineplex.
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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 Vineet Kulkarni has no position in any of the stocks mentioned.