In today’s market, undervalued stocks are not that easy to find. This is not surprising, as the S&P/TSX Composite Index continues to hit record highs. In this article, I’ll review an undervalued contrarian stock that’s down 76% in the last 10 years. It’s a stock that I’ve been bullish on for a few years, but the market has yet to warm up to it. Let’s take a look at this stock, Cineplex Inc. (TSX:CGX).
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Down but not out
Before the pandemic, the movie exhibition industry was already feeling pressure. The emergence and rapid growth of streaming services had begun eating away at Cineplex’s revenue and earnings. Then the pandemic happened, and this understandably sent Cineplex into a tailspin.
What followed was a period of big losses, heavy debt load, and a general skepticism with regard to the viability of Cineplex’s business. So, the stock got hit hard and is trading today at a mere fraction of what it was trading at 10 years ago.
This is obviously not good. But the one silver lining for investors is the opportunity to buy Cineplex stock at grossly undervalued valuations today. This contrarian stock is trading at a mere 12 times next year’s estimated earnings and nine times 2027’s estimated earnings.
Box office results come in strong
To gauge the health of Cineplex’s business, it’s been a good exercise to compare box office results to pre-pandemic levels. On this front, Cineplex is increasingly making strides. For example, in April, Cineplex reported box office revenue of $51,375 (90.3% of 2019). In May, box office revenue was $55,331 (80.5% of 2019), and in June box office revenue was $51,770 (90.9% of 2019). And this was the first quarter since 2019 that box office revenue exceeded $50,000 every month.
These numbers are reflective of the fact that Cineplex’s movie exhibition business is far from dead, as some investors seem to be pricing in. In fact, it’s now approaching 2019 levels. In 2019, Cineplex stock was trading at an average of roughly $25.
Although the recovery has been anything but easy, the strategies that Cineplex’s management has employed have been highly effective. For example, the focus on premier experiences such as VIP and 4dx movie experiences has driven attendance and margins.
Also, getting into gaming as well as the media business has driven growth and diversification benefits. Last quarter, the media segment (11% of revenue) posted a 32.9% increase in revenue and in the location-based entertainment, or gaming, business (14% of revenue), revenues grew 10.5% to $38.1 million.
Cineplex stock: Looking ahead
Cineplex will be reporting its second-quarter results on August 12. Estimates are calling for earnings per share (EPS) of $0.06, compared to a loss of $0.33 last year. The year is benefiting from a successful movie slate, which is driving attendance as well as a successful premium offering that’s driving revenue and margins.
On top of this, Cineplex has been experiencing a recovery of its media segment and continued record results from the gaming segment.
The bottom line
I have many good things to say about Cineplex and its stock. But investors are not pricing in much of my optimism into the stock. I think the market is overly negative and that Cineplex will outperform as earnings ramp up. In my view, this ramp-up will also cause investors to re-rate this contrarian stock and assign it a higher multiple.
