Don’t count Cineplex out just yet, says this portfolio manager

For the past 12 months, theatre entertainment company Cineplex Inc (TSX:CGX) has seen its share price get knocked around pretty good, losing 43 per cent of its value since last July. The causes are many, says Lyle Stein, managing director at Vestcap Investment, who nevertheless sees good value in the stock, the dividend yield and in the company’s Scene reward card.

Last May right before blockbuster season began, Cineplex’s share price hit a new all-time high of $54.81. But the ensuing 12 months have been more horror show than feel-good entertainment, with the blame falling on a mix of box office duds, the failure of Cineplex’ unlimited pass promotion and dwindling attendance in the face of home streaming services like Netflix. And while the company has made efforts to diversify their business, providing more VIP options along with expanded arcade-style entertainment, investors have yet to regain faith in the stock.

The company’s first quarter 2018 financials provide the evidence, with attendance down 9.3 per cent over the same period in 2017, but with revenue per patron increasing enough to bring total revenue down a modest 0.9 per cent for the quarter.

Yet Stein, whose company recently introduced Cineplex to its equity income portfolios, says that investors can count on CGX’s impressive dividend while at the same time not forgetting the powerful asset that Cineplex has in its Scene card.

“The stock has been blitzed, as everyone knows,” Stein told BNN Bloomberg this week. “It got down below $28, and it was yielding 6 per cent plus. I think three things hit them last year, bad movies being the biggest issue, then the whole movie pass notion of all-you-can-eat movies and the general decline in the theatres in the US. You put that all together and the stock got pounded.”

“[But] we’ve had a good run in movies — I think the Q2 is going to be way ahead of the Q2 last year and I think going to the end of the year, we’ll see better movie offerings. That’s good for them,” he says.

“The thing I’m intrigued about with Cineplex is their Scene program and how far they’re penetrated into the Canadian household. That’s a wonderful asset,” Stein says. “There was a report I read, someone was ballyhooing the fact that [Cinemark Theatres] in the US has 250,000 Scene card-like people. In Canada, 30 per cent of the population can be touched with a Scene card.”

“I think they understand the entertainment business well, it’s a cheap stock and we think the dividend is safe,” he says. “That’s why we bought it, for the income fund. And it could bounce and you could easily go mid-$40s.”