As Canada’s largest movie exhibition and entertainment company, Cineplex Inc. (TSX:CGX) has a great opportunity today. You see, society is moving on from the pandemic. Today, we are roaring back to normal – this means travelling, eating out, and going to shows.
Cineplex’s stock price has rallied almost 20% in the last three months. Here’s why now is the right time to buy CGX stock.
Momentum is building at Cineplex
It’s not a stretch to say that there were times in recent history when Cineplex’s very survival was placed into question. First, it was the rising popularity of streaming. Many said that this would be the death of theatrical movie releases. Then, came the pandemic, when theatres were shuttered and debts began piling up.
But none of that was, in fact, the end of theatrical movie releases and the theatrical movie-going experience. On the contrary, it’s actually alive and well – and thriving. In February, 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. Prior to this, box office numbers were extremely dismal and concerning. In the fall, it even dipped as low as 52%.
So, this recovery to 88% of per-pandemic levels is big. But even in 2022, Cineplex was showing clear signs of a recovery. For example, revenue increased 93% in 2022. Also, net income swung to a positive $133 million from negative $249 million in 2021.
Credit facility covenants relaxed
Cineplex currently holds a lot of debt. This is no surprise after the difficulties of the last few years. In fact, the company’s debt-to-capital ratio is a very high 112%. This means that Cineplex has more liabilities (debt) than assets. It’s not a good spot to be in.
But within this scenario, I take comfort in two things. Firstly, it’s important to take note of the fact that this situation is a one-time situation that happened as a result of an extraordinary event (the pandemic). Prior to the pandemic, Cineplex carried reasonable levels of debt and was very financially sound.
Also, in response to this very difficult situation, Cineplex’s lenders have taken action. More specifically, they have eased some of Cineplex’s borrowing covenants. These covenants usually dictate how much cash flow a company must generate relative to the debt they hold. If cash flows fall below a certain mark, the debt contract would be adjusted. This usually means more fees, an increase in the interest rate, or an increase in the collateral. This would clearly create a whole new wave of problems and obstacles for Cineplex and Cineplex stock (CGX)
The easing of these covenants is really important for Cineplex. The most obvious reason is because it gives the company time to get its cash flows back up to “normal” levels. Also, it reflects the confidence that these financial institutions have in Cineplex’s business – the belief that Cineplex will recover.
Motley Fool: The bottom line
Cineplex is on a nice recovery path today. This is starting to be reflected in Cineplex’s stock price, but there’s a lot of room to move higher still as this recovery takes hold. If we assume a recovery, which I am assuming, then it’s very clear that CGX stock is grossly undervalued.
March was an important month for Cineplex. It’s clear to me that the happenings during the month are acting as catalysts for Cineplex stock. As investor confidence continues to ramp up, and Cineplex’s results continue to show momentum, the stock should continue its rise, in my opinion.