Heading into 2023, many investors knew that Cineplex (TSX:CGX) was one of the few stocks that had an opportunity to see its share price recover. While many stocks have been struggling in the current economic and market environments, Cineplex has been significantly undervalued since the start of the pandemic, leading many investors to wonder if now is the time to buy the stock.
2023 was widely anticipated to be the year that the Hollywood film industry recovered after it saw massive production shutdowns and delays due to the pandemic.
And while many blockbusters have been released this year, it wasn’t until last weekend, when Barbie and Oppenheimer simultaneously came out, that many investors took notice of how much potential theatre stocks like Cineplex had.
So, given all the highly anticipated films that are still to be released later this year, as well as all the success we’ve seen from movies that have already been released, is Cineplex stock worth buying today?
Is Cineplex stock a buy in this environment?
Considering just how cheap Cineplex stock is, as well as how well both it and the film industry are recovering, it certainly looks like one of the best value stocks that investors can buy now.
Many expected Cineplex stock to recover this year, and its operations, as well as its box office numbers, continue to point to an improving operating environment.
So, considering the potential it has to recover this year, it’s no surprise that as of Tuesday’s close, Cineplex stock has already gained more than 15% this year. Yet even after its slight recovery to date, Cineplex continues to have a significant runway to continue gaining value.
Analysts anticipate Cineplex can generate $1.6 billion in sales this year, up 25% from 2022 and more than 95% of the sales it did in 2019, the last full year before the pandemic.
Furthermore, analysts also expect that Cineplex will be profitable this year for the first time since 2019 as it continues to see an improvement in its operations. Right now, the estimates show Cineplex should be able to generate $0.25 in earnings per share (EPS) for 2023, up from a loss of $0.10 per share in 2022 and losses of $4.46 per share and $5.83 per share in 2021 and 2020, respectively.
In addition, analysts estimate that in 2024, its EPS can grow by over 300% to more than $1. So, with Cineplex trading at $9.26 per share as of Tuesday’s close, it’s trading at just 9.1 times its forward earnings.
Just how cheap is Cineplex?
Trading at just 9.1 times its forward earnings is certainly a cheap valuation, giving investors the opportunity to buy Cineplex stock while it’s still undervalued. However, when you compare its valuation now to what Cineplex was trading at prior to the pandemic, it’s clear just how cheap it is today.
In the year leading up to the pandemic, Cineplex stock averaged a forward price-to-earnings (P/E) ratio of 28.4 times. Furthermore, the lowest its forward P/E ratio fell to over that year was 18.8 times. So right now, Cineplex trades more than 50% below its cheapest valuation in the year prior to the pandemic, showing how much value the stock has today.
And while many expect a recession to materialize in the near term, the North American theatre industry has historically been resilient through recessions. Sales have grown through both the last two economic downturns. So the one major risk that Cineplex investors could face is the ongoing strike south of the border.
These risks are, of course, more long-term since films typically take years to produce. However, if the strike is prolonged, it could have impacts similar to the shutdowns we saw from the pandemic, which could end up hurting Cineplex stock in the medium term.
So while the stock certainly looks undervalued today, and the risks it faces are still minimal, they’re certainly worth keeping in mind.
Regardless of the uncertainty, though, Cineplex has a dominant position in the Canadian market. So with the stock trading ultra-cheap at just 9.1 times its expected 2024 earnings, it certainly looks like one of the best Canadian stocks that you can buy today.
