Is Now the Perfect Time to Buy Cineplex Stock (TSX:CGX)?

Cineplex stock is significantly undervalued as it’s shunned by investors. Yet, the business is showing great strength.

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Watching Cineplex Inc. (TSX:CGX) stock sure feels like watching a bad horror movie these days. I mean, CGX stock has fallen 36% in 2022 alone. And this comes after its terrible pandemic performance. But the question that I’m sure many of you are asking is the same. Is the star of this movie, Cineplex stock, destined for death? Or will it rise up out of the ashes and come out of this alive?  

Cineplex’s stock price has been decimated, and the consensus is that this is currently not a good storyline. However, when expectations get this low and dire, it’s often the perfect time to jump in. Let’s explore.

Cineplex stock (CGX): Out of the pandemic comes a new and improved business

The pandemic really threw Cineplex stock for a loop. It was the biggest business disruption that nobody could have ever predicted. But two-and-a-half years later, we know that Cineplex made it through. Yet, while the worse of the pandemic is behind us, the struggle is not over. Most investors are very skeptical about the movie exhibition business. Streaming, they say, will be the last nail that seals Cineplex’s coffin.

Cineplex stock price cgx stock

But maybe the pandemic has initiated some positive changes. For example, it seems like studios are seeing renewed value in theatrical releases. The big deal that is made of a movie release in theatres is valuable. According to Cineplex, studios have realized that a theatrical window is crucial for them to achieve the best financial reward and build their brand.

An illustration of this realization is the increased cooperation between streaming companies and Cineplex. For example, an agreement was recently made with Netflix. In this agreement, Netflix’s movie, “Glass Onion: A Knives Out Mystery”, will have a theatrical release, playing at 40 Cineplex theatres for a week in November.

The theatrical window is the time a movie spends exclusively in theatres. While it’s true that the industry standard 90-day theatrical window has turned into a 45-day window, all is not lost. The fact is that 75% to 80% of a movie’s box office dollars are made in the first three weekends of a film release.        

Cineplex’s stock price is factoring in all doom and gloom

Just as many companies have had temporary supply chain issues due to the pandemic, Cineplex has as well. This has come in the form of on-set and post-production delays. This has culminated in a very weak film slate in the second half of 2022, mostly August and September. We can see the effects of this in box office numbers.

In July, box office revenues were 85% of July 2019 revenues. But this was followed by August, when movies were impacted by COVID delays. In August, box office revenue was only 64% of 2019 levels, and in September it was only 54% of 2019 levels.

A recession-proof form of escape

In the past, going to the movies has proven to be a relatively inexpensive way to “escape” – even during recessions. As quoted by Cineplex, box office numbers have increased in seven of the last nine recessions. This is easily understandable because a night at the movies is clearly less expensive than many alternatives.

For example, live concerts are significantly more expensive. Also, sporting events and vacations would be more likely to be curtailed. In their place, a night out at the movies or even one of Cineplex’s rec rooms would provide an affordable night of escape.

Motley Fool: The bottom line

So in closing, I would like to emphasize how low expectations are for Cineplex stock. And how unrealistic I believe these low expectations are. Its movie business has shown positive signs of growth this year, and after the pandemic delays are worked through, the strong trends from earlier in the year should continue. Also, Cineplex is a diversified entertainment company. In fact, 30% of its revenue is coming from other segments, such as the amusement and leisure segment, which is posting record results.

Lastly, Cineplex’s stock price is so cheap, trading at a mere eight times next year’s earnings. Buy when everyone else is selling. It’s not the end of the movie – the climax is coming.

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 Karen Thomas owns shares of Cineplex stock. The Motley Fool recommends CINEPLEX INC. The Motley Fool has a disclosure policy.

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