Cineplex Inc. (TSX:CGX) has sure had a hard time in the last few years. Not surprisingly, Cineplex stock is reflecting this. In fact, it trades at approximately $10, making it a highly undervalued stock. But what better time to consider buying a stock than when it is pricing in an overly negative outlook?
There is no better time. Read on as I explain why I think that Cineplex stock will be much higher in a few years.
The pandemic all but destroyed this undervalued stock
But it didn’t. Today, this movie exhibition company has re-invented itself into a more profitable, diversified, and relevant company than before.
Let’s tackle profitability first. Cineplex’s premium experiences, such as VIP movies, have drawn in more movie-watchers while increasing margins. Secondly, Cineplex is more diversified, with its gaming and media businesses offering a good complement to the overall business. Lastly, Cineplex has become more relevant than before the pandemic. This was driven by its partnerships and collaborations with streaming companies. Contrary to what many had feared, we have seen that both can exist and thrive.
Box office results are heating up at Cineplex
We already know that box office revenue for the quarter came in at $174.9 million. This is 7% lower than last year and only 2% lower than 2019 (pre-pandemic). For the full quarter, box office revenue was 98% of pre-pandemic levels. This is a significant achievement, as it provides the evidence that Cineplex can and will return to pre-pandemic revenues and profitability.
As a reflection of the optimism that Cineplex’s management is feeling, they recently announced a share buyback program. This program authorizes the buy back of up to 10% of the total shares outstanding. Now that the balance sheet has improved and the headwinds are increasingly in the rear-view mirror, management is clearly getting increasingly optimistic. This is what is driving this decision.
Additionally, there continues to be talk of reinstating the dividend in the not-too-distant future. According to management, when attendance levels are at 75% to 80% of 2019 levels, this would put them in a position to re-initiate the dividend. In 2023, attendance levels came in at 72% of 2019 levels.
As the movie slate continues to improve, attendance levels will likely continue to climb. Re-instating the dividend would signal that the company has come full circle – survived the pandemic, the writers’ strike, and even the threat from streaming services.
Management believes, as I do, Cineplex shares are trading well below their intrinsic value, making it a highly undervalued stock. As a result, the share repurchase program is the best way to return capital to shareholders.
Bullish expectations
Cineplex will be reporting its third-quarter results on November 6. Analysts are calling for earnings per share of $0.08 compared to $0.29 in the same period last year.
In terms of the outlook, analysts have a 12-month target price of well over $18. This means that they are expecting an 80% return on the stock. In my view, investors remain overly skeptical about Cineplex despite the undeniably positive turn of events.
As a result, Cineplex stock trades at a price-to-earnings (P/E) ratio of a mere 11 times next year’s earnings.
The bottom line
Cineplex continues to recover, but the recovery has been more of a gradual and bumpy recovery than any of us would have liked. Yet, Cineplex stock is up 27% year-to-date as it’s beginning to reflect the increasingly positive developments and outlook. It won’t remain such an undervalued stock for long.
