After Cineplex (TSX:CGX) stock struggled throughout the pandemic, and after falling by more than 40% through 2022, it finally looks like 2023 will be the year it can turn its business around.
So far, already year to date, the stock is up by more than 10%. Furthermore, Cineplex stock is up 17% since mid-March, when it reported its strong box office numbers for February.
One of the biggest obstacles it has faced in the last few months is that even without capacity restrictions, a lack of compelling content as Hollywood plays catch-up from its pandemic shutdowns has hindered Cineplex stock from recovering sooner.
However, the box office numbers are now showing that as more blockbuster films get released, Cineplex has the potential to see a significant recovery in profitability this year, which could lead to a major rally.
In both January and February this year, box office numbers were roughly 88% of 2019 levels, representing a strong start to 2023. Furthermore, as the year goes on, more movies are set to be released.
By my count, there are more than 20 blockbuster movies scheduled to be released this year, including five superhero movies, several sequels of popular films, as well as highly anticipated movies such as Barbie.
Therefore, not only are pandemic restrictions not impacting Cineplex anymore, but Hollywood has also now clearly recovered from production shutdowns.
And as that leads to a recovery in attendance, it should have a significant influence on Cineplex’s ability to see its revenue recover and, most importantly, start becoming profitable again.
With Cineplex stock on the verge of profitability, it could rally significantly in 2023
As I mentioned above, 2022 saw many pandemic restrictions lifted, which led to a nearly 100% year-over-year increase in Cineplex stock’s revenue to just shy of $1.3 billion. Furthermore, it lost just $0.10 per share in 2022, compared to a loss of $4.46 per share in 2021 and $5.83 in 2020.
Plus, for 2023, analysts expect that not only will its revenue continue to rebound, to roughly $1.6 billion, but Cineplex should be able to generate earnings per share (EPS) of $0.50.
Therefore, the stock clearly has the potential for a consistent rally, especially when you consider how cheap it trades today.
How cheap is Cineplex today?
With the stock trading at less than $9 a share today, Cineplex has a forward price-to-earnings (P/E) ratio of less than 18 times. Furthermore, it’s trading at less than 8.9 times its expected 2024 earnings.
That’s not just undervalued; it’s also well below where Cineplex stock traded prior to the pandemic. For example, in 2019, it had an average P/E ratio of 26.4 times earnings.
Therefore, as long as there aren’t any unforeseen roadblocks that impact Cineplex’s operations throughout 2023, it has the potential to rally significantly.
To get to a P/E ratio of more than 26 times, Cineplex stock would have to rally to around $13 a share, roughly 45% higher than where it trades today. And it’s worth pointing out that right now, the average analyst target price is $12.76, shy of $13.
Furthermore, if Cineplex can see a noticeable improvement in its profitability and continue recovering through 2023, it could even rally past $13, considering that analysts expect it will earn $1.00 in EPS next year.
Therefore, by the end of 2023, even if Cineplex still only had a forward P/E ratio of 18 times as it does today, as long as analyst estimates remain the same, the stock could rally to roughly $18 a share, more than 100% higher than where it trades right now.
So if you have cash that you’re looking to invest and want to buy a high-potential stock that’s trading ultra-cheap, Cineplex is certainly one of the best companies to keep your eye on over the next few months.
