Cineplex is a pass for me, this portfolio manager says

It’s tempting, but investors should stay away from down on its luck Cineplex (Cineplex Stock Quote, Charts, News, Analysts, Financials TSX:CGX), says Cole Kachur of Wellington-Altus Private Wealth, who thinks there are too many unknowns to warrant your investment dollars.

Cineplex, of course, got thrashed at the start of COVID when cinemas across the country shut down, delivering a big blow to an already struggling industry in movie theatres. 

But before 2020, Cineplex was turning heads with its moxie, fighting back against declining attendance at its theatres by finding new ways to make each theatre-goer count. Through sweetening the theatre experience with perks like VIP seating, dining and arcade entertainment Cineplex was succeeding. Its 2019 revenue was up compared to 2018 (albeit by a small 3.3 per cent) to $1.665 billion. Earnings were still a challenge, however, with full 2019 taking in $0.46 per share compared to $1.22 per share for the previous year.

And while the financials were beginning to turn around, Cineplex also brought home to investors a takeover bid in December 2019 from global theatre giant Cineworld to the tune of $2.8 billion. At the time of its proposal, Cineworld was planning on paying $34 per share in cash for CGX, making for a nice 42 per cent premium to its then-current share price.

But that was then and this is now, with a lot of water under the proverbial bridge. The pandemic has decimated theatres worldwide and that proposed Cineworld deal would have been all but forgotten if it weren’t for the lawsuits now flying back and forth between the two companies.

Still, with the re-opening of economies in a (hopefully) post-pandemic environment, it’s only reasonable for investors to think that buying Cineplex might be a good idea, especially with its share price still stuck at about half of its value from pre-COVID days. 

Is Cineplex really only half the company it once was or is there value to be unearthed in the name?

Kachur says it depends on how fast you think people will be putting bums back into theatre seats.

“Cineplex has been a confounding one just because I, like you, like going to the movies and I think people will go back and they’ll spend money,” said Kachur, vice president and senior wealth advisor at Wellington-Altus, who spoke on BNN Bloomberg on Friday.

“But just with COVID and everything else that’s went on over the past year and a half, with a lot of titles being delayed — and a lot of them are being delayed again here — but what’s the path where a company like Cineplex can really start to become profitable again?” he said.

“I don’t disagree that maybe it has built in a base and, technically, if economies stay open and everything else that people will start going back, but I don’t think it’s going to be a mad dash. I think it will be slow, and people will have to get used to getting back into that frame of mind again,” he said.

“So, I’m not a huge fan of Cineplex,” Kachur said.

Cineplex gave a snapshot of its business last week with its second quarter 2021 results, delivered on August 12. The company’s revenues were up almost triple what they were a year ago in the second quarter, but that’s not saying much at $64.9 million compared to pre-COVID quarters registering above $400 million each. The company’s net loss was $103.7 million with EPS at a loss of $1.64 per share.

Nevertheless, management chose to stay upbeat in its comments, pointing to the return of theatre-goers as reason to be positive.

“The big screen is back! As of July 17, our entire circuit of theatres and entertainment venues were open, and guests are coming back in strong numbers to see movies the way they are meant to be seen,” said Ellis Jacob, President and CEO, in the quarterly press release. “During the quarter, we remained prudent in managing costs and reduced our average monthly net cash burn to $24 million for Q2, down from $27 million in Q1, as our circuit continued to reopen across the country.”

Kachur said investors wanting to take a flier on the cinema industry might want to go for American chain and Reddit-friendly meme stock AMC Entertainment.

“If you’re trying to hit a home run, maybe look at AMC which is very volatile,” Kachur said. “But for me and the type of investing I do Cineplex isn’t a name that really checks the boxes.”

“I just think there’s a little bit too much risk there, just with the state that we’re in and all of these delays and with them not having other revenue lines other than movies. And then, if people aren’t allowed or able to go to the movies then how do they make money?” he said.