Is Now the Right Time to Buy Cineplex Stock?

Cineplex stock continues to languish, but recent results are pointing to a strong recovery this year. The stock remains grossly undervalued.

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Much has been said about Cineplex Inc. (TSX:CGX), Canada’s number one movie exhibition and entertainment company, that would lead investors to run for the hills. But I do not plan to sell. On the contrary, I’m here to talk about why, in fact, you should consider buying Cineplex (CGX) stock today.

Cineplex (CGX) stock remains below $10 but the business is recovering

As of today, Cineplex’s stock price is still trading well below $10. This reflects the pandemic-related difficulties that Cineplex has had. It also reflects recent troubles with a lack of content, which ultimately hurt attendance. Despite this latest struggle, Cineplex’s recent results have been good.

For example, revenue increased 93% in 2022. Also, net income swung to a positive $133 million from -$249 million in 2021. Furthermore, as we move out of the pandemic, Cineplex’s results have strengthened across the board.

February’s box office receipts came in at 88% of pre-pandemic levels. This follows January’s box office receipts that also came in at 88% of pre-pandemic levels. These numbers are a strong indication that the recovery is well under way. This performance follows the more dismal fall box office receipts that were as low as 52% of pre-pandemic levels. It reflects a better film slate and more dollars spent per patron.

More to look forward to from Cineplex

Following these encouraging box office numbers, there’s optimism for March and for a sustained recovery to take hold. March box office receipts will be released in a couple of weeks, and until then, I remain optimistic for a number of reasons.

Firstly, March break will certainly give Cineplex’s box office numbers a nice boost. Also, the film slate in March has been the fullest it has been since before the pandemic. For example, blockbuster movies like John Wick and Creed are some of those expected to drive box office numbers. These two factors working together can potentially lead to very strong results out of Cineplex. So, stay tuned.

Over and above Cineplex’s movie exhibition business, we can’t forget about its other rapidly growing businesses. Today, Cineplex’s revenue from sources other than movie exhibition accounts for 34% of total revenue. And these segments are growing fast. In the media segment, for example, revenue increased 71% in 2022. Also, in the amusement/recreational segment, revenue increased 83% in 2022 to a record $246.6 million.

Valuation is unsustainably low

Cineplex’s stock price is currently trading at eight times expected 2023 earnings and 14 times expected 2024 earnings. This compares to a fourth quarter earnings growth rate of 56%. In light of this, as well as Cineplex’s strong free cash flow generation of $1.7 million compared with a cash outflow in the prior year, the stock appears highly undervalued.

But there’s one more catalyst to mention before wrapping up – earnings estimates are likely too low, in my view. So, as is typical with companies that have gone through difficult times, sentiment on Cineplex stock is very bad. With this, earnings estimates are skewed to the negative, as the negative sentiment has become entrenched in the stock. This means that, in my estimation, these estimates will rise in the coming months as Cineplex’s recovery becomes more apparent. That always leads to stock price appreciation. Investors in CGX stock have a lot to look forward to.

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 has a position in Cineplex. The Motley Fool recommends Cineplex. The Motley Fool has a disclosure policy.

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