The pandemic is behind us. Many companies have fully recovered from the losses and have started a new growth trajectory. However, one company still struggling with its pandemic losses is the theatre chain Cineplex (TSX:CGX). The post-pandemic world for Cineplex had a new challenge of increasing theatre attendance and frequency. And the best audience puller is none other than a box office hit.
Cineplex stock’s bull run
Cineplex stock, which has been in the red since the pandemic, saw some momentum in the second half of 2024. The stock price surged 75% between June 21 and December 6, 2024, amid the holiday season spending. According to the RBC Consumer Spending Tracker, Canadians spent more on gifts for entertainment, art, clothing, and jewelry in 2024.
Moreover, several box office releases gave people more reasons to visit the theatre. However, the huge dependence on movies and their promotions creates volatility in revenue expectations for Cineplex. Hence, the 2024 surge in Cineplex stock price is unsustainable as the company is seeing a secular change in consumer habits.
The shift in consumers’ entertainment spending
Many studies have shown that people spend more on entertainment during tough economic conditions. The pandemic has brought a change in consumer behaviour. Gen Z’s are willing to take on debt to spend on entertainment and travel. And within entertainment, they are spending more on live entertainment like sporting events than movies and theatres, according to a CNBC article citing the May 2024 Consumer Price Index.
Even though the data is from Americans, it shows a shift in how consumers are spending on entertainment. A May 2024 survey by CIBC on Canadians’ summer spending showed that 31% of respondents are looking to better manage and/or cut back on entertainment expenses.
Cineplex valuation concerns
Box office and theatre food service continues to be its biggest revenue generator, contributing 80% to its third-quarter revenue. Circling back to the challenge of increasing footfall in theatres, Cineplex has been trying various strategies such as releasing international films. This segment contributed 9.3% to the box office revenue.
It is no doubt that Cineplex is a strong company with excellent execution. It has also diversified to high-margin segments including in-theatre advertising, such as quick service restaurants, The Rec Room, and Playdium. However, Cineplex’s huge debt of $1.9 billion has kept its profits negative. The Bank of Canada’s interest rate cuts could reduce interest expenses and help the cinema chain turn profitable.
However, Cineplex stock is trading at a forward price-to-earnings (PE) ratio of 13.76x despite reporting losses. A recovery in the stock price in December pushed it to the overbought category with a Relative Strength Indicator (RSI) of 95. RSI is a technical indicator that measures the 14-day momentum of the stock and signals the stock as overbought if the RSI score crosses 70.
An overbought stock tends to fall and Cineplex stock fell 14% since December 6. Despite the dip, the stock is up 54% since June 2024.
Is Cineplex stock a Buy or a Sell?
Cineplex is not a long-term growth stock as it operates in a mature market. Consumers now have many other sources of out-of-home and in-home entertainment, making theatres one of the options. The management’s current focus is to return to the pre-pandemic level. Even before the pandemic, Cineplex stock has been in a downtrend falling 50% between July 2017 and September 2019.
Cineplex stock may not be a buy at the current valuations as it could see a seasonal decline with no upcoming major Box office releases. Whether to sell the stock depends on when you purchased it. Despite the 75% rally in the stock, its price reached $13, the level last seen in 2022 when interest rates were low. If you bought the stock in 2022, you could consider selling it and cutting your losses.
Instead, you can channel your funds into stocks with growth potential, such as Telus Corporation. The recovery rally could make up for Cineplex’s losses and give 7.9% in annual dividends.
