Shares of Cineplex Inc. (TSX:CGX) have fallen over 30% since November 2018. The stock is trading at $24.8 — 9.5% above its 52-week low and 30% below its 52-week high. Cineplex stock has fallen 25% in the last 12-months. It has grossly underperformed the broader markets in the last five years and has slumped over 40% since August 2014.
So, is the stock a “buy” at the current price? Have Cineplex shares bottomed out and trading at an attractive valuation? Let’s look at the company’s financial metrics.
Revenue and sales growth Analysts expect Cineplex to grow sales by 4.5% to $1.69 billion in 2019 and 4.1% to $1.76 billion in 2020. Its earnings per share are estimated to fall by 38.5% in 2019 and then rise by 30.7% in 2020. However, analysts have forecast Cineplex earnings to fall at an annual rate of 13.1% over the next five years.
Comparatively, Cineplex stock is trading at a forward price-to-earnings multiple of 24.9, indicating that the stock is overvalued. Analysts, however, remain optimistic about Cineplex and have a 12-month price target of $30.94 for the stock. The target price is 27% higher than the current trading price.
Is declining theatre attendance a massive threat? Investors are worried about the gradual decline in theatre attendance. The cord-cutting phenomenon rising popularity of online streaming services are driving cinema footfalls lower.
Cineplex is seeking to diversify revenue streams from its Rec Room business and other entertainment offerings instead of banking on just Hollywood movies for growth.
Cineplex and other theatre outlets rake in money when a highly anticipated movie is released. But popular movies such as Avengers: End Game and Captain Marvel are not released throughout the year, making this a somewhat cyclical company as well.
However, Cineplex management continues to have a positive outlook and have bought back company shares in the last three months. Will they be able to turnaround Cineplex’s fortunes? The movie industry continues to remain popular and forms an integral part of the domestic populace.
Is Cineplex’s high dividend yield enough to attract investors? Cineplex has a dividend yield of close to 8% — a yield that’s more than doubled in recent years driven by the company’s massive fall in its share price. The dividend payout stands at over 100% and Cineplex is unlikely to increase dividends in the near future.
Cineplex’s high debt balance of $2 billion might concern investors given that it’s almost twice the company’s market cap. Will the high debt result in lower dividend payouts for investors going forward? The dividend account for 209% of company earnings.
The verdict Stocks such as Cineplex will also do well in a recessionary environment where the unemployment rate rises and people tend to spend more on recreational activities. But the high expected growth in online streaming will seize viewership from theatres.
The streaming space has attracted major players such as Disney, Apple (NASDAQ:AAPL), and WarnerMedia in recent times as well as traditional leaders such as Netflix (NASDAQ:NFLX), Hulu, and Amazon (NASDAQ:AMZN) Prime.
There are just too many uncertainties surrounding the company right now. Cineplex is an overvalued stock with falling profit margins and high debt. Investors need to stay away from Cineplex, especially when markets are expected to remain choppy in the next 12 months.
Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.
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