You can’t sleep well at night owning Cineplex, this investor says

These days, Canadian theatre company Cineplex (Cineplex Stock Quote, Chart TSX:CGX) is doing an admirable job at squeezing more money out of its patrons, but the few bucks extra on popcorn and soda aren’t about the change the sector-wide dynamics, which show a continued decline in attendance, says Brian Madden of Goodreid Investment, who adds that even with a dividend north of seven per cent, investors in search of long-term security need to look elsewhere.

“I would be cautious with this company,” says Madden, senior vice president and portfolio manager for Goodreid, to BNN Bloomberg on June 13. “The issue that we would have with this business in the context of preserving capital is that it does have a strong relative position but in an industry that in our view is probably in secular decline, and that’s why you’ve seen the share price come off so much.”

“There are two publicly-traded movie theatres in the United States, one of which is AMC, and that stock is down even more [than Cineplex]. It’s off about 70 per cent from its high a few years ago. The other one is Cinemark and it’s chopping along, doing a little better,” says Madden.

CGX was a strong climber for the better part of a decade, gaining over 220 per cent in value between July 2007 and July 2017. But that’s when the bottom fell out of the stock, which has lost half of its value over the past two years.

Cineplex’s last quarterly report in May was representative of the company’s fortunes. Attendance over CGX’s first quarter 2019 was down 15.6 per cent year-over-year, where 2018’s release of the Marvel film Black Panther had brought in stronger patron numbers.

Yet declining attendance was partially offset by an uptick in revenue per patron, which rose from $10.21 in last year’s Q1 to $10.44, with concession revenue per patron moving from $6.09 to $6.35. Overall revenue for the quarter dropped from $390.9 million to $364.9 million.

At the same time, Cineplex raised its dividend in May, taking it from $1.74 per share on an annual basis to $1.80 per share. CGX’s dividend yield currently sits at about 7.5 per cent.

“They’re trying to drive more sales from drinks, popcorn, a lot of the places have liquor licenses now, and they’re opening sites like the Rec Room, which are multi-purpose entertainment complexes. All good strategies, but at the end of the day there’s a huge installed base of theatres that are not seeing the traffic that they used to and so I just don’t think that this is the kind of company where it’s a long-term, sleep-well-at-night, capital preservation story that you should be exposing your RRSP investment to,” says Madden.

“I want to get more constructive on the name but it’s a show me story —I want to see it in the earnings, the sales, the cash flow and the dividends,” he says.

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