Can Cineplex Stock Finally Recover in 2024?

Cineplex stock trades at a cheap multiple but remains a high-risk investment due to its weak balance sheet.

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Shares of Cineplex (TSX:CGX) have trailed the broader markets significantly in the last four years. The Canadian cinema giant was decimated amid COVID-19 due to lockdowns and a massive slowdown in movie production. CGX stock fell from $34 in December 2019 to $4.63 in October 2020 and is currently priced at $8.18.

Valued at $518 million by market cap, let’s see if Cineplex stock can recover in 2024.

Cineplex is on the road to recovery

Cineplex is a leading media and entertainment company based out of Canada. With more than 170 cinemas, it attracts millions of customers to its entertainment venues each year. At the end of the third quarter (Q3) of 2023, it owned, leased, or had a joint-venture interest in 1,631 screens in 158 theatres from coast to coast in addition to 13 LBE (location-based entertainment venues) in six provinces.

Its primary business segment is Film Entertainment & Content which brought in $1.2 billion in annual sales back in 2019. With a 75% market share in Canada, Cineplex is the country’s largest motion picture company.

Historically, theatrical exhibitions have experienced strong growth through periods of recession. Moreover, in the last 18 months, blockbuster movies such as Top Gun: Maverick, Avatar: Way of Water, Barbie, and The Super Mario Bros. Movie have cumulatively garnered roughly US$6.5 billion in box office sales, allowing Cineplex to report revenue of $1.57 billion in the last four quarters.

Despite a sluggish macro environment in 2023, people are flocking back to theatres. In the first three quarters of 2023, Cineplex increased sales by 33.7% year over year to $1.22 billion, as theatre attendance was up 32.7% compared to the year-ago period.

The uptick in sales allowed Cineplex to report a net income of $176 million year to date, compared to a loss of $10 million in the prior-year quarter.

Cineplex’s box office revenue rose 51% to $188.2 million in Q3 due to the releases of Barbie and Oppenheimer, allowing the company to record its highest summer box office weekend record and its second-highest grossing weekend of all time. The Barbenheimer phenomenon contributed to a theatre attendance increase of 41.6% to 15.7 million in Q3.

What is the target price for Cineplex stock?

Cineplex enjoys a leading market share in Canada and continues to diversify its revenue streams. Box office accounted for 40.6% of sales, food service brought in 31.5%, and the amusement business contributed 16.2% to the top line in Q3.

Though Cineplex has posted solid results in 2023, it continues to wrestle with balance sheet debt, which stands at almost $2 billion. In the first nine months of 2023, its interest expense grew by more than 31% to $112.3 million due to changes in the fair value of interest rate swaps.

Analysts tracking CGX stock expect sales to rise by 27.9% to $1.62 billion with adjusted earnings of $1.21 per share. So, priced at 0.33 times forward sales and five times forward earnings, Cineplex stock is quite cheap and trades at a discount of 50% to consensus price target estimates.

Cineplex stock remains a high-risk investment due to its balance sheet debt and fluctuating top-line growth, which depends on the success of the movie industry.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Cineplex. The Motley Fool has a disclosure policy.

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