Schools will soon (or are already) out for summer. The latest summer blockbuster season has already started, and with it, there’s some sense of a return to normalcy. Along with the reopening of businesses and theatres, there’s an underlying question around Cineplex (TSX:CGX).
Should investors (finally) consider investing in Canada’s largest entertainment company?
What’s the deal with Cineplex?
Cineplex operates the largest movie theatre network in Canada. Cineplex’s earnings are overly reliant on the traditional movie-and-popcorn business, which has suffered in recent years.
In fact, that segment has arguably suffered more than any other business under the pandemic.
But Cineplex’s problems stem further back than the pandemic. Cracks in that century-old business model started to appear nearly a decade ago when streaming services started to gain popularity.
The idea that subscribers can pay a monthly fee (which is less than a single admission ticket) to have unlimited access to thousands of titles is huge. The fact that those movies can be streamed on a growing number of devices from just about anywhere was a game changer.
Under the pandemic, with theatre revenue drying up due to closures, most major studios quickly adapted and launched their own streaming services. Again, those services were priced at a significant discount over the traditional movie-and-popcorn business.
If anything, the pandemic only accelerated that shift, as studios began to roll out exclusive content to that digital platform. This has left Cineplex in a favourable and awkward position.
To be fair, Cineplex has attempted to divest itself from its over-reliance on its theatre business. The company’s promising Rec Room business is a prime example of this. The same could be said of Cineplex’s digital media signage operation.
Unfortunately, in the case of the Rec Room, that business is still reliant on groups of people gathering in enclosed places. Prior to the pandemic, the Rec Room business was looking promising, and Cineplex was investing heavily into growing that business.
Now that COVID rules are being relaxed, that growth can resume.
Should you buy Cineplex?
That’s the main question for investors to consider. In short, Cineplex’s business is improving, fueled by (at least in the short term) a series of blockbuster films that will drive patrons back into theatres.
That improvement is something that is gaining steam. By way of example, in the most recent quarter, Cineplex reported revenue of $228.7 million, handily beating the dismal $41.7 million reported in the same period last year. Both box office and concession revenue saw solid growth during the most recent quarter.
In terms of attendance, Cineplex welcomes 6.7 million patrons into its doors in the most recent quarter. By way of comparison, in the same quarter last year, only 415,000 patrons came to theatres.
Overall, despite those improvements, Cineplex still reported a quarterly loss of $42.2 million, or $0.67 per share loss. Still, the loss was an improvement over the same period last year, when the company posted an $89.7 million loss.
Summer blockbusters such as Top Gun: Maverick, Thor: Love and Thunder, and Lightyear will keep attendance numbers growing.
Additionally, as a means of offsetting losses and returning to profitability, Cineplex noted that one option in the future could be to exit some underperforming locations. This would also offset the loss of some patrons to the streaming business model noted above.
But is it enough?
Final thoughts: Buy Cineplex now?
Cineplex has endured a lot in the past two years. The company is leaner, no longer offers a dividend, and still operates under a century-old business model. Perhaps most importantly, that business ignores the growing threat of the streaming model business. That’s a colossal shift, especially when compared to the e-commerce vs. brick-and-mortar retail model.
In my opinion, the risk in investing in Cineplex, even at its still discounted rate, is too great. There are far better options for growth-minded investors to seek out. Many of those options still offer a dividend like Cineplex once did as well.
