Cineplex Inc. (TSX:CGX) was one of the worse-hit stocks during the pandemic. In fact, Cineplex’s stock price is down significantly from pre-pandemic levels of over $33, and remains below $10 today. For those investors who believed that the stock would recover when the pandemic came to an end, it’s been a disappointing ride.
But all is not lost. Today, Cineplex’s stock price remains cheap, yet the business is on increasingly stronger footing. Here are three reasons to buy the stock.
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Cineplex’s diversification
It’s important to note that Cineplex is not the same company that it once was. It is, in fact, a more diversified company. One that has diversified away from the movie exhibition business. This was a strategic move that management made in order to protect the company as streaming became more and more of a threat.
And this strategy has paid dividends. In 2023, Cineplex’s movie exhibition segment (which includes food) accounted for approximately 74% of Cineplex’s revenue. Cineplex’s other segments, such as its “location-based entertainment”, or LBE, business, are performing well. The LBE business achieved record revenue of $132.4 million in 2023, and continues to expand.
It is moves like this that give me confidence in the value of Cineplex. The business has evolved and continues to evolve. As the company continues to respond to market forces, I see value in its brand, its real estate, and its strategy.
While the consumer is facing hardship due to inflation, Cineplex’s business is one that has proven to be recession-proof. While move ticket prices are on the rise, it remains one of the least expensive entertainment options for a night out.
A re-invigorated movie exhibition business
After the pandemic, the writer’s strike hit. Yet another blow to Cineplex’s movie exhibition business – just as we saw a glimmer of hope for the stock, it was taken away. But eventually, the writer’s strike ended. And today, movie content is recovering, with a movie slate that continues to improve. As such, the second half of the year is expected to be filled with better movie content. And better movies are expected to equal better attendance.
On top of this, the movie experience has improved, with VIP theatres proving to be very popular. With heated, reclining seats, and at-your-seat ordering service, the VIP experience is bringing movie-watchers in and ramping up Cineplex’s profitability. This, combined with improving content, can be expected to drive attendance higher.
Cineplex stock valuation factoring in the worst-case scenario
Yes, it’s true that Cineplex faces many risks. For example, streaming platforms have put pressure on Cineplex’s business, with many movie-watchers opting for movie nights at home. Also, the company suffered a major blow during the pandemic. Today, this is evidenced in the heavy debt-load that Cineplex carries.
However, as discussed earlier in this article, Cineplex is staging a comeback of sorts. While things remain volatile and uncertain, the stock is cheap. This means that if Cineplex does succeed in turning the business around and re-establishes itself as a premier entertainment company, the stock today is a screaming buy.
The bottom line
While Cineplex stock continues to face challenges, it remains grossly undervalued. In my view, the risk/reward proposition on it is quite attractive. Therefore, CGX remains one of my recommended stocks to buy.
