Pat McKeough responds to many requests from members of his Inner Circle for specific advice on stock picks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week an Inner Circle member asked us about Canada’s most prominent movie chain, Cineplex. The company is coming off a quarter in which a host of successful movies pushed up revenue, only to see earnings per share fall due to higher expenses. Pat looks at this company’s strengths and weaknesses and at the general outlook for movie theatres as they face increasing competition, especially from home entertainment.
Q: Hi Pat: Thanks for all your great advice over the years. I’m interested in your thoughts on Cineplex. It has a big market position, but the P/E seems quite high. Thanks again.
A: Cineplex Inc., (symbol CGX on Toronto; www.cineplex.com), is the dominant movie theatre operator in Canada and the fifth-largest in North America.
The company owns or has interests in 161 theatres containing 1,632 screens. Its brands include Cineplex Odeon, Galaxy, Scotiabank Theatres, Famous Players, Coliseum and SilverCity. Cineplex takes in about 70% of Canada’s total box office revenue.
In the three months ended December 31, 2013, Cineplex’s revenue rose 8.2%, to $323.2 million from $298.7 million a year earlier. Higher ticket prices and concession sales were behind the gain. Its top-selling movies in the latest quarter were The Hunger Games: Catching Fire, The Hobbit: The Desolation of Smaug, Gravity and Frozen.
Even with the higher revenue, earnings per share dropped 39.6%, to $0.32 from $0.53. That was due to higher operating expenses, including costs for films, food and rent, plus the cost of integrating acquisitions. The shares yield an above-average 3.5%.
Cineplex is now looking at new growth projects, including adding more VIP theatres with amenities like alcoholic beverages and Bollywood movies from India.
The company has also entered into a collaboration with Tim Hortons (symbol THI on Toronto and a recommendation of our flagship advisory on Canadian investing The Successful Investor). Under this deal, Tim Hortons will broadcast its own content in what aims to be a creative, informative and entertaining way in more than 2,200 of its Canadian coffee-and-donut shops. Cineplex’s media division will sell advertising for the TimsTV network.
A key to Cineplex success, refreshments draw criticism for nutritional value
However, theatre operators are highly dependent on the popularity of the current crop of Hollywood productions, and they need healthy ticket sales to cover the high cost of showing these films. In fact, they make a sizeable part of their profit from the sale of refreshments. A season of unsuccessful films can devastate their results for the year.
There’s a large random element in the success or failure of a film or any artistic work—substantially more so than in the stock market. A lot of history supports the idea that “there’s no accounting for taste.”
In the longer term, cinemas face rising competition from home entertainment. Cinemas also face criticism for the poor nutritional value of the soft drinks and popcorn—drenched in butter or margarine—that are their standard refreshment. However, pessimists have predicted the film industry’s failure since the arrival of radio.
In the Inner Circle Q&A, Pat looks at Cineplex’s prospects for growth as he assesses the factors it must cope with in the increasingly competitive entertainment business. He also considers the earnings outlook for Cineplex. He concludes with his clear buy-hold-sell advice on this stock.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
Entertainment generates an enormous amount of revenue these days, but opinions vary widely on the best way to profit from it. What do you think are the best stocks for cashing in on the vast demand for entertainment?
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