It’s been over four years of significant headwinds impacting Cineplex (TSX:CGX), but we might finally be on the cusp of a major recovery in the entertainment stock. Therefore, while it’s trading below $9 a share and offering investors so much value, it’s certainly a stock you’ll want to consider.
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Why is Cineplex stock still so cheap?
Just like the pandemic, over the last four years, Cineplex has consistently been affected by significant headwinds. Some of these headwinds have impacted the entire market, such as surging inflation and rising interest rates. Meanwhile, other headwinds, such as last year’s lengthy Hollywood strike, have impacted Cineplex’s industry directly.
And because movies take so long to make, production delays, which we saw throughout the pandemic and then again last year during the strikes, have limited the new and compelling content that Cineplex has to draw viewers to its theatres.
So, when you couple that with rising costs such as labour and other expenses due to the significant uptick in inflation in the last few years, it’s no surprise that Cineplex stock continues to trade undervalued.
What is surprising is that with all the potential it has to recover in the near term, and with the stock already seeing much more sales than it did through the pandemic, it still trades as cheaply or even cheaper than it did through most of 2020 and 2021.
Therefore, while it continues to trade below $9 a share, there’s no question that Cineplex is one of the top stocks to keep your eye on today and consider buying before it recovers.
When will the beaten-down stock start to recover?
As I mentioned above, many of the factors that have prevented Cineplex from recovering and are ultimately keeping its share price low have been uncontrollable factors, such as the pandemic, inflation and the Hollywood strike.
And to its credit, Cineplex has done what it can to drive growth in sales and profitability. For example, it continues to entice users to spend on concessions, improving the margins it makes for every customer who walks through the door.
Furthermore, it has successfully restructured its debt, simplifying the structure and extending the maturities to give itself some breathing room, which should pay dividends as many analysts expect Cineplex to start a significant recovery in the second half of the year.
In fact, with several blockbusters now scheduled to be released in the second half of 2024 and throughout 2025, Cineplex could see a noticeable uptick in revenue over the coming quarters.
Therefore, when you consider that it’s consistently been looking to optimize its cost structure over the last few years, not only could its revenue recover significantly in the near term, but so too could its profitability.
How is Cineplex expected to perform in the near term?
Although first-quarter sales were down significantly compared to last year (13.5%) and just 81% of its first-quarter sales in 2019 (the last year before the pandemic), analysts still expect Cineplex to marginally increase sales this year thanks to a significant uptick in the second half of the year.
In fact, for the full 2024 year, analysts are estimating Cineplex will do $1.39 billion in sales roughly 84% of the sales it did in 2019. Furthermore, analysts are anticipating more than 7% growth in revenue next year to over $1.5 billion, or roughly 90% of the revenue it did in 2019. So, it’s clear that the stock is well on its way to recovering.
More importantly, though, Cineplex is still expected to be profitable despite the increased headwinds. And while its normalized earnings per share (EPS) are expected to be just $0.52 this year, analysts expect a significant jump next year to $1.12.
Therefore, with Cineplex trading below $9, it’s certainly undervalued. In fact, right now, Cineplex is trading at just 12.4 times its expected earnings over the next four quarters, well below its five-year average leading up to the pandemic of 26.3 times.
Plus, four of the five analysts covering Cineplex rate it a buy and the average analyst target price of Cineplex is $13.87, a roughly 66% premium to where it trades today, making it a stock you’ll certainly want to consider before it inevitably recovers.
