As you know, the stock market has been quite strong in the last year. This means that many stocks have done well. Yet, there are some underperformers – like Cineplex Inc. (TSX:CGX). But this is part of what makes Cineplex stock the best stock for Motley Fool investors to invest in today.
Let’s take a look.
Cineplex’s recovery from the pandemic days
In the last year, Cineplex has made quite a remarkable recovery. Despite investor fears, the company has shown us a few things. Firstly, the movie-going experience is still very much in demand. Secondly, Cineplex’s diversification strategy is paying off. And lastly, management is successfully driving value in the business.
Let’s tackle my first point. Cineplex’s third-quarter results, which includes the summer months, were the best quarterly results ever. Attendance was 90% of 2019 levels, and revenue as well as earnings before interest, taxes, depreciation, amortization, and special losses, or EBITDaL, far exceeded 2019 levels. Also, box office revenue in August was the third highest of all time, and came in at 120% of pre-pandemic 2019 levels.
As we can see from Cineplex’s performance this summer, consumers still value the movie-going experience, and when the offering is appealing to them, this is the result.
Today’s challenges are surmountable
Clearly, there are other factors at play here, because the fall months were less bullish. While Cineplex’s diversification strategy has been successful, and the movie exhibition business now accounts for 70% of total revenue, it remains its biggest segment. This means that movie content matters – a lot.
The writers’ strike last year put a dent in Cineplex’s otherwise strong movie slate. Because of this, attendance suffered, as movie-goers were not as eager to watch the sub-optimal content that was being offered.
Today, the strike is over. This means that this year, we can look forward to a long list of blockbusters that are sure to get more people into the theatres. Furthermore, this means that Cineplex will be able to showcase its new improved business. Let’s go back to the third-quarter results to do this.
In the movie exhibition segment, attendance was 90% of 2019 levels. Yet, revenue was 113% of 2019 levels, and adjusted EBITDaL was 135% of 2019 levels. Premium offerings such as VIP movies have bumped up Cineplex’s revenue and margins. In fact, the company’s EBITDaL margin was 19.2% in the third quarter, compared to 16.1% in 2019
Cineplex’s valuation suggests doom
Despite all of this, Cineplex stock’s valuation remains in depressed, ultra-undervalued territory. It’s trading at eight times next year’s consensus EPS expectation, and six times 2025’s consensus EPS expectation. It actually suggests that Cineplex’s earnings will not recover back to pre-pandemic levels.
But I see it differently. I think that interest expense will go down significantly, attendance will get a boost as movie content improves, and Cineplex’s amusement segment will continue its strong growth path. All of this will boost Cineplex’s earnings and drive increases in Cineplex stock.
Motley Fool: The bottom line
In closing, I want to recognize the negative sentiment that’s surrounding Cineplex stock, while pointing out that it was once thought of by many Motley Fool members as a reliable dividend payor that commanded a premium multiple.
Have things really changed this much, or do we just need to see past this temporary pain to brighter days ahead?
