The first quarter of 2017 was a good one for Cineplex Inc. (TSX:CGX).
Cineplex posted a decent 4% increase in revenue, and the “other” segment, which now represents 21.6% of revenue, increased 24.4%. This segment offset more lacklustre performance by the box office segment (49.6% of revenue) and the food service segment (28.9% of revenue), which saw revenue growth of -1.7% and +1.7%, respectively. Notable in the quarter was the growth in the all-important box office per patron (BPP) and concession revenue per patron (CPP), which increased 3.3% and 5%, respectively.
So, as we have seen from the revenue results, diversification is paying off.
Dividend hike
The dividend was increased 3.7% this quarter, and the dividend yield on the stock now stands at 3.1% — a good yield for income-seeking investors.
Upside?
With ticket prices steadily increasing as the company adds enhanced offerings for movie goers, I question how much upside is left. We have seen BPP increase 3.3% to a record $9.97 in the first quarter — a result of increasing premium product offerings that have been well accepted by movie goers. Premium products now represent 44.9% of box office revenue, which is up from 42.2% last year. And CPP increased 5% to $5.71 in the first quarter.
While the company still has some initiatives it is working on to drive BPP higher (most notably, the recliner seats), it appears to me that upside in this area is getting to be limited.
On another note, the video-on-demand business is one that management has flagged as having good growth ahead of it; they can see double-digit growth ahead. And, of course, we know that the amusement and Rec Room businesses are seeing good growth.
Capital expenditures to remain high
Cineplex has all the markings of a good long-term holding for investors. The only thing I would caution is the fact that the stock’s valuation is not cheap, and, more importantly, that in pursuit of growth in its non-Hollywood revenue, the company will continue to see an increased level of capital investment in the next few years.
These factors might put pressure on the stock in the short term.
Valuation
I would like to close by looking a little more closely at valuation of Cineplex’s shares. The stock now trades at 30 times this year’s earnings and 25 times next year’s consensus earnings estimate. By no means is it a cheap stock. In fact, it appears to me to be valued highly enough to shift the shares into a more negative risk/reward position, at least in the short term.
