For more than four years now, Cineplex (TSX:CGX) stock has been heavily impacted by factors outside of its control. From the pandemic lockdowns and indoor capacity restrictions to Hollywood strikes, the Canadian entertainment stock has been trading well undervalued as its operations and profitability have been heavily impacted.
Many investors were hoping for a swift recovery once the pandemic ended and indoor capacity restrictions were lifted.
However, Cineplex also relies on compelling content from Hollywood to show on its screens. So, not only was its post-pandemic recovery delayed, as it waited for Hollywood to catch up after its own pandemic restrictions, but the strikes last year also contributed to a delayed recovery for Cineplex and other North American theatre stocks alike.
So it’s not necessarily surprising to see Cineplex stock continue to trade so cheaply, while it weathered the storm and recovered as quickly as it could.
Now, though, with several Hollywood blockbusters released this year and many more scheduled to be released in the second half of 2024 and into 2025, Cineplex stock could finally start to gain the momentum that investors have been waiting so patiently for.
Therefore, many investors are undoubtedly asking themselves if it’s finally time to buy Cineplex stock.
Should you buy Cineplex stock today?
Besides the impacts I listed above that Cineplex has faced, another major concern around the stock and the market in general is the economic environment we find ourselves in today.
It’s not surprising that Cineplex stock struggles at a time of market uncertainty. When the economic environment has so much uncertainty, higher-risk recovery stocks like Cineplex are even less favourable, as investors prefer reliable recession-resistant companies.
However, it’s worth noting that historically, theatres haven’t seen massive dips in their revenue during times of economic turmoil. Furthermore, with many blockbusters now being released, industry sales are finally starting to catch up to their pre-pandemic rate.
For example, to date, in the third quarter (July 1st to August 11th), North American box office numbers have been strengthening rapidly. So far in the quarter, box office numbers have reached 97% of 2019 levels, a promising sign.
Furthermore, this past weekend, North American box office totals were 19% higher than in 2019 and 41% higher than last year.
Plus, it’s not just the industry metrics that look promising, either. With Cineplex restructuring its debt and now announcing plans to start buying back shares, it appears as though the stock has finally turned the corner and is set for a significant recovery rally, making now the perfect time to consider buying the undervalued stock.
How cheap is Cineplex?
With Cineplex trading just over $10 a share, the stock has a tonne of potential over the coming months, especially if a recovery continues to materialize.
For example, analysts predict that Cineplex’s revenue will rise by more than 11% next year. Furthermore, Cineplex stock is also expected to generate $0.84 in normalized earnings per share next year, giving it a forward price-to-earnings ratio of just 12.2 times today.
In addition, the stock is expected to generate earnings before interest, taxes, depreciation and amortization (EBITDA) of roughly $365 million this year. That would equate to roughly 90% of the EBITDA it generated in 2019. It also gives Cineplex an enterprise value (EV)-to-EBITDA ratio of roughly 6.8 times today.
Therefore, considering that in the five years leading up to the pandemic, Cineplex stock traded with an average EV/EBITDA ratio of 11.2 times, 6.8 times its expected EBITDA this year is considerably cheap.
Not to mention, in the last week, since it reported its second-quarter earnings, the stock has already begun to rally and is up by roughly 15%. Furthermore, in the last month, the stock has gained more than 21%.
Therefore, if you’re looking to buy Cineplex while it’s still undervalued, you’ll want to act soon, as the stock has a tonne of momentum today and finally looks like it could start to see a sustained recovery rally over the coming months.
