The past 12 months have been dismal for entertainment and media company Cineplex (TSX:CGX), both in terms of box office returns and when it comes to the company’s share price.
Is there a happy ending to this story or are investors going to keep getting burned? More than likely, the stock will continue falling, says Avenue Investment Management’s Paul Harris, who argues that movies just aren’t where people are willing to spend their entertainment dollars anymore.
Last month, Toronto-based Cineplex released its 2018 first quarter financial results, which featured a nine per cent drop in attendance compared to the same period a year ago and a six per cent decline in box office revenue. The company’s per patron revenue improved, however, as the company attempts to offer movie-goers more VIP options for theatre experiences as well as expanded arcade-style entertainment.
“We continue to execute our diversification strategy to reduce our reliance on the relative strength of quarterly box office comparisons,” said Ellis Jacob, President and CEO. “Total revenue for the first quarter of 2018 was relatively flat, down 0.9 per cent to $390.9 million compared to the same period last year, as the revenue strength of the new businesses was offset by the decline in exhibition revenue as a result of a 9.3 per cent attendance decrease.”
Last summer, CGX’s share price fell off a cliff, losing 34 per cent of its value in two months. The ensuing period hasn’t been much better, leaving investors wondering when the stock will bottom out. Harris claims that’ll come when Cineplex starts trading at a multiple more fitting with the new reality.
“I think the issue for me with Cineplex is that they’ve spent their time diversifying their businesses and they’ve got other things that are maturing and actually paying off for them, but what I get worried about is, is there is a secular change in people’s views about going to the theatre?” says Harris, partner and portfolio manager at Avenue Investment, to BNN Bloomberg.
“I’ll go see Avengers Infinity War at the theatre but, you know, Lady Bird, you don’t care if you see it at the theatre or at home where you’ve got a big screen and you’re fine,” he says. “And there’s a large generation of people who would much rather watch stuff on their TV or whatever and they can download it for free. This is the problem.”
The fall in share price may be offset for some investors by Cineplex’s handsome dividend, which is currently yielding about six per cent. Harris says that aside from the dividend, though, the stock is trading at 23x forward earnings, which is just too high for a business in a transitioning sector.
“I would say something between 15x and 18x [earnings] is where you want to buy as opposed to where it is today at 23x,” says Harris. “I grapple with that a lot because I think there’s a secular change going on.”