film, projector, movie projector

Opinion: Cineplex has an Undervalued Stock but it’s Quite Scary

Let’s have a chat about Cineplex and their stock (ticker: CGX.TO).

Different introduction, same me. Yet, that sounds like someone making a New Year’s resolution, so let me waste no more of your time.

I have been looking at Cineplex’s stock over the past couple of weeks. During this time, it was hovering around $8 a share. It has been so volatile over this period and is the true definition of “Hot and Cold” by Katy Perry.

The company has $2 billion in debt and I cannot see them paying this off in the short-term. Plus, with a short amount of cash in hand, it makes me scared. The company just received an additional $250 million in debentures, so they continue to operate across Canada. This debentures will be converted in a period of 30 days.

To add to this fire, they are currently pursuing a lawsuit with Cineworld over the company backing out of their purchase agreement of Cineplex back in December of last year.

So, with all of this being said, is this stock actually undervalued? Well, I do think it is considerably undervalued for being Canada’s largest operating cinema. Still, with the pandemic at hand, it is unclear whether the global cinema industry will ever be the same.

Based on the company’s financials, I would say this is not undervalued. Although Cineplex’s revenues have increased over the past couple of years, their earnings have stayed constant or have decreased. I do not imagine that margins are particularly high within the cinema industry. If we see an integration of delivering movies to homes rather than in theatres, there would be high margins. I see this happening in the distant future, and it is possible COVID-19 would speed up this integration process.

I will speak briefly about the company’s ratios. Their price/sales ratio is quite low, due to the low share price it currently sits, and they do have reasonable revenues at $1.58 billion. However, the PEG ratio is only 0.01, which is just way too low, even if it does signify the stock is undervalued. Also, the forward P/E at -260.00 is well, concerning.

However, the one thing I have liked about this stock from the beginning was its share price would increase over time due to the opening of cinemas across the country. Ontario just recently released details about stage 3 that is slated to begin within the next couple of days of this article being written.

Whether Cineplex’s stock price will go up significantly as its cinemas reopen, remains to be a good question. In my belief, this share will not reach $30 as it did prior to the pandemic, for several years to come.

We have to remember that this pandemic is ongoing, meaning that attendance in the theatres will decline sharply due to the decrease in capacity these cinemas can hold.

This pandemic will result in lower sales of food, beverages, and tickets, while the company continues to pay its employees. I imagine in response to this the company will retain fewer employees to earn a positive net income, if possible, at all.

No one knows how long this pandemic is going to last, and we certainly aren’t going back to the same society we lived in 6 months or even a year ago. Capacity for the cinemas will be down for the next couple of years until they can hold their regular capacity, which will overall hurt Cineplex.

Plus, not many people will go to Cineplex theatres the instant they are open. There are not many movies being currently produced due to COVID-19 and several movies that were going to release in the Spring and Summer have been pushed back its release date to later in 2020.

I see too many red flags holding this long-term unless there are rumours of a buyout, which could increase the price. However, one could find significant benefit holding this over the short-term as cinemas slowly reopen across the country. That being, buy when the share price is low, and when theatres open up, sell the shares.

So, although the stock is undervalued considering it is the largest cinema theatre across the country, this is not worth buying long until we have more control over COVID-19.

All of the stock’s statistics were taken from Yahoo Finance.

Let me know what you think about this stock, and as always, email us at [email protected] if you want to request us to write on a particular topic. 

UPDATE: I forgot to give this a grade. In which, I give this stock a grade of C.

Disclaimer: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only.