After the record-breaking box office collections of Barbenheimer, investors may think that the Cineplex (TSX:CGX) story may be back on track. But the reality is just the contrary. Even though the company posted growth in its second-quarter (Q2) 2023 quarterly report, it lacks the value that can facilitate long-term returns to investors.
Why? Here are just a few reasons.
Five-year stock price performance of -71%
At the time of writing, Cineplex stock is down a whopping 71% over the past five years. Notably, this comes despite the stock remaining flat on a year-to-date basis, bolstered by the aforementioned strong box office numbers seen this past quarter.
Despite a return to profitability of late, Cineplex is a company that remains heavily under the microscope of long-term investors. This isn’t the cash flow-producing machine it was five to 10 years ago. Indeed, the cinema business is one with structural headwinds that have continued to manifest themselves in lower customer traffic numbers in recent years.
Competition commissioner sticks to its guns
In late July, Canada’s competition commissioner announced plans to hold its ground on the claim that Cineplex is using deceptive marketing techniques. Responses filed to the tribunal indicated that the Canadian multiplex giant mischaracterized its ticket-purchasing procedures. The claims were essentially that individuals couldn’t book tickets at prices displayed on the website due to additional online booking fees.
While this may be common practice, this is just one of the issues Cineplex is dealing with right now. Consumers have other options (mainly in the form of streaming), and phantom fees and other inconveniences may only serve the company poorly over the long term. Thus, whether Cineplex wins its dispute with the competition commissioner doesn’t really matter — these allegations are indicative of various systemic problems in this sector.
Cineplex’s declining financial health
Cineplex’s financial health took a hit from the pandemic. All investors know that.
However, we’re long past the days of social distancing, mask wearing, and stay-at-home orders. Canadians are able (and for the most part willing) to be jammed back into uncomfortable seating for three hours at a time in an enclosed room.
The thing is, it appears consumers simply don’t want to. Cineplex’s earnings growth rate over the past year was a dismal -16% compared to the entertainment industry, which grew 12.1% over that period. The company’s heavy debt load of $838.4 million remains a thorn in the side of investors, considering its total liabilities ($2.3 billion) are currently greater than its total assets ($2.23 billion).
Cineplex is an intriguing turnaround story for some, with a few interesting catalysts that may entice certain speculators to take a position. However, in my view, long-term investors shouldn’t get sucked into owning this stock here, no matter how cheap it looks.