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Topic: Growth Stocks

Happy ending may be elusive for Canadian theatre chain

Recently a member of Pat McKeough’s Inner Circle asked whether it was time to sell shares in theatre operator Cineplex. After showing steady growth for several years, the shares have fallen off in the past six months. The same trend is mirrored by the leading U.S. theatre chains.

Pat notes that Cineplex is seeking to broaden its appeal beyond movies, with initiatives such as a new gaming complex and a partnership with a U.S. sports entertainment venue. While movie theatres have outlived many predictions of doom, he adds, the rising competition from home entertainment and the aging of the population do not work in the industry’s favour.

Q: Pat: I would like to know if it is time to sell Cineplex. I have held it for a while and the stock has done well for me, but is it time to move on given the current trend? Thanks.


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A: CINEPLEX INC. (symbol CGX on Toronto, www.cineplex.com) is the dominant movie theatre operator in Canada and the fourth largest in North America.

The company owns or has interests in 164 theatres containing 1,677 screens.

Cineplex shares have dropped 22% over the last month. That mirrors the price drops of major U.S. operators including AMC (down 33%) and National CineMedia (down 20%).

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 sizable part of their profit from refreshment sales. A season of unsuccessful films can significantly hurt their results for the year.

This summer, hit movies were almost non-existent. Even though Wonder Woman and Guardians of the Galaxy 2 delivered strong results, the number of box-office failures easily outshone the successes. Among the failures, Tom Cruise’s The Mummy and King Arthur: Legend of the Sword both disappointed on their opening weekends, while huge franchises like Pirates of the Caribbean and Planet of the Apes showed signs of fading.

Without the hits, Cineplex’s box-office revenue falls, as well as sales at concession stands of marked-up popcorn and drinks.

Hopes that August would save the season were dashed when The Dark Tower made only $19.2 million its first weekend. It’s a fraction of the $132 million opening of Suicide Squad at the same time last summer.

Cineplex’s balance sheet is strong, so it can weather a poor year: its long-term debt is $447.8 million, or a low 18% of its market cap. It also held cash of $21.4 million. The company’s shares yield a high 4.3%.

Growth stocks: Exclusive partnership to bring Topgolf venues to Canada

Cineplex aims to offer a broader range of entertainment than just movies to cut its risk and add growth prospects. This includes a new gaming complex it recently opened in Toronto called the Rec Room. In its first five weeks of operation, it brought in $2.5 million in revenue—although pre-opening costs hurt earnings. Cineplex already had one Rec Room open in Edmonton, and plans to open two more this year in Edmonton and Calgary.

The company also recently formed an exclusive partnership that will bring U.S.-based Topgolf’s sports entertainment venues to Canada. The joint venture aims to open multiple Topgolf locations in markets across the country during the next several years.

Topgolf offers point-scoring golf games using microchipped balls that instantly score themselves, showing players the accuracy and distance of their shots on a TV screen in their hitting bay. Topgolf locations are typically three-level, 65,000-square-foot venues that feature high-quality food, drinks, big screen TVs and music in climate-controlled hitting bays year-round. Its year-round programming includes events for kids and families, social leagues, groups, golf tournaments and instruction.

But looking closer at movies: 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.

Of course, pessimists have predicted the film industry’s failure since the arrival of radio, yet it has muddled through. The number of blockbuster failures this year also seems like an anomaly.

In the longer term, however, cinemas face rising competition from home entertainment, as high-quality sound, big screens and 3D viewing become more affordable. Moreover, young, single people make up a large part of film audiences, so the aging of the population is a negative factor. Cinemas also face criticism for the poor nutritional and high-caloric value of the candy, soft drinks and popcorn—drenched in butter or margarine—that are their standard refreshment and key profit-maker.

Inner Circle recommendation: We don’t recommend Cineplex.

For our recent report on a Canadian growth stock that has just taken an important step, read This stock’s big acquisition looks like a perfect fit.

For our advice on picking the best growth stocks for your portfolio, read Top guidelines for a successful growth investment strategy.

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