What’s an investor to do with a riddle of a stock like Cineplex (Cineplex News, Stock Quote, Chart TSX:CGX) Should you sell the stock?
Declining attendance at the cinema yet laudable measures by the company to diversify its revenue stream. An alluring dividend yield sitting at 7.5 per cent but that’s coupled with a multi-year drop in share price.
The picture gets clearer, however, when you combine CGX’s slim profit margins with an industry in decline. So says portfolio manager James Telfser, who claims that despite the high yield, CGX is a disaster movie in the making.
“We’ve spent quite a bit of time over the last couple of months on Cineplex, trying to get our heads around it,” says Telfser of Aventine Asset Management to BNN Bloomberg on Wednesday. “We’re not long or short at the current time but we are bent to the negative on the name.”
Cineplex, which will report its second quarter earnings on August 8, saw total revenues decline in its Q1 in May, falling from $390.9 million in Q1 of 2018 to $364.9 million.
A big reason was theatre attendance, which was down 15.6 per cent year-over-year, with the company blaming it on a poorer slate of films, especially in comparison to the previous year’s Black Panther which boosted its Q1. Yet Cineplex still managed to get more money from customers that actually made it to the movies, driving up box office revenue per patron from $10.21 last year to $10.44 and concession revenue per patron from $6.09 to $6.35.
“Cineplex has struggled over a number of years, partly because of attendance but mostly because of margins,” said Telfser. “One of the big worries is that they’re taking their free cash flow and investing it elsewhere, which is great but it’s a lot of the cash flow that’s coming out of a business when you’re in a declining business.”
“Another thing is the movies that have come out —you’d expect them to make a lot of money from an Avengers Endgame or something like that which actually isn’t the case but whoever makes the movie actually takes a larger slice of the pie and Cineplex is left with a smaller margin,” he says.
Telfser says that he typically likes to buy names that are trending, meaning that they’re close to their 52-week highs, which is definitely not the case with Cineplex. Year-to-date, the stock is down six per cent and for the last 12 months it’s down 18 per cent.
“Maybe the dividend is safe for now but just be careful. A seven-and-a-half per cent yield usually tells you something with a stock like this,” says Telfser. “We’d be sellers at this point.”