As Warren Buffett so eloquently put it, “This imaginary person out there — Mr. Market — he’s kind of a drunken psycho.”
As this quote suggests, making sense of stock price movements is anything but simple. It’s an art as much as a science because it is largely driven by emotion. Yet if we can understand the why, then we can maybe begin to predict the future with a greater sense of accuracy.
Cineplex (TSX:CGX) is up 20% since the company released its second-quarter earnings result back in August. It was not a good result. Yet, the company’s outlook and observations for the future are what has driven the stock price. In this case, the reason why this stock is up after earnings is easily explainable.
Cineplex stock rallies despite a rough quarter
Second-quarter results came ahead of expectations. Earnings per share (EPS) were negative $0.33 versus expectations that were calling for a loss of $0.44, as total revenue declined 24% to $277.3 million. This highlighted the fact that Cineplex stock was pricing in an overly pessimistic outlook.
But let’s move on to the more important matter: what has really been moving the stock higher? As you know, attendance in the last few years has been quite bad. First, the pandemic hit, and then, just as the pandemic was nearing an end, the writer’s strike hit.
On the quarterly call, the company said that they believe June was a pivotal point of change that signals a more positive rest of the year. Movie content is back, and this is boosting theatre attendance sharply. For example, June attendance levels were 72% of pre-pandemic levels, and July levels were 76% of pre-pandemic levels. Box office revenue hit 90% of pre-pandemic levels in June and 94% of pre-pandemic levels in July, with expectations of even higher attendance and box office levels in August.
Cineplex management announces a return of capital to shareholders
As a reflection of the optimism that Cineplex’s management is feeling, they also announced a share-buyback program. This program authorized the buyback of up to 10% of the total shares outstanding.
Now that the balance sheet has improved and the headwinds are increasingly in the rearview mirror, management is getting increasingly optimistic. This is what is driving this decision. Additionally, there continues to be talk of reinstating the dividend in the not-too-distant future. This would signal that the company has come full circle — survived the pandemic, the writers’ strike, and even the threat from streaming services.
Management believes, as I do, that the shares are trading well below their intrinsic value, and so for now, the share repurchase program is the best way to return capital to shareholders.
Analysts raise target prices
When analysts raise their target prices, it usually sparks interest and optimism from investors. This is exactly what happened after Cineplex released its quarter. For example, TD analysts raised their target price on the stock to $16. There were a number of other analysts who also raised their target, but this is the highest one that I saw. This signals a recognition of the momentum that’s building in Cineplex’s business.
The bottom line
Cineplex stock rallied very nicely as a result of an improving outlook for its business. In my mind, the reason this stock is up after earnings is very rational and easily explained. It’s not always so easy to explain stock price movements, but this one is clear. The latest quarterly update has increased my confidence in the stock. As we see this recovery play out, the upside remains significant, in my view.
