Positive price breakout or a head fake? Is the stock of theatre operator Cineplex Inc. ready to continue on its run, or is it due for a pullback?
Earlier this week the shares of Cineplex experienced a technical breakout. As the stock price approached $50, the share price of Cineplex crossed its 50-day moving average of $49, leading me to wonder if this was a positive price breakout or head fake? While I hold the utmost respect for the management team of Cineplex and appreciate the company's solid fundamentals, I believe the stock valuation is stretched right now. In my opinion, the stock price is fully valued at current levels. However, I expect this stock will exit 2015 just as it began 2015 – with a stellar rally. This is a stock to watch and buy when it pulls back from current levels.
As Canada's largest movie theatre operator, with 162 movie theatres across the country, Cineplex is the dominant player. Its strong management team has a solid vision for the company's future direction, and data show the plan is working. Concession per patron has increased to record levels, and box office revenue per patron has also increased as the chain offers more premium movie options such as 3D, IMAX, UltraAVX, and expanded VIP cinemas.
Cineplex's shares have been a stock leader. This stock has outperformed the S&P/TSX composite index from 2007 through 2013. Over the past 10 calendar years (2005-2014), shares of Cineplex have appreciated 205 per cent, compared with a 58-per-cent gain for the TSX. The stock is up more than 10 per cent year to date, compared with a 3.2-per-cent return for the S&P/TSX composite index, and the stock has also outperformed its respective sector, the consumer discretionary segment.
Technically, Cineplex's stock price has been in a solid uptrend: rallying, consolidating, and then re-accelerating. In 2014, the stock price was relatively flat – not surprising since the company's earnings before interest, taxes, depreciation and amortization (EBITDA) was relatively flat during the year.
But most of Cineplex's gains this year came in the first six weeks of 2015. Since mid-February, its shares have been range bound, bouncing between $47 and $51. I believe shares may drift down to the lower end of this consolidation band and re-accelerate in the fall. Technically, the shares appear to have formed an inverse head and shoulders formation, meaning that there is significant resistance at $50 (what would be considered its neckline), and around $51. There is support at $49 – at its 50-day moving average, and at $47 and $46.
Shares of Cineplex are trading at a valuation above its peers and above its historical trading average. The stock is currently trading at over 12 times 2016 consensus enterprise value to EBITDA – which I consider a rich valuation.
What might re-accelerate the price momentum and make the valuation more compelling? Mainly earnings momentum, which I believe will be driven by an impressive fourth-quarter movie release slate. The latest James Bond movie is due to be released in November, along with the final instalment of the Hunger Games series. In December, movie theatres light up with the anxiously anticipated Star Wars Episode 7, as well as Kung Fu Panda 3 and Mission Impossible 5.
With this strong lineup, earnings growth is anticipated to ramp up materially compared with last year. The company reported adjusted EBITDA of $201-million in 2014, relatively flat compared with the prior year. However, growth is set to rocket higher this year and next year; the Street is forecasting EBITDA of $253-million in 2015 and $291-million in 2016.
Here's my bottom line: Cineplex is an excellent core holding for a portfolio and it provides investors with an attractive yield. Its current dividend is 13 cents a quarter, for a yield of 3 per cent. However, in the near-term, second-quarter box-office revenue may be disappointing, and the summer release slate is rather lacklustre so the stock may drift lower. However, Cineplex has solid technical and shareholder support that will limit any dramatic downdraft. Put this stock on your radar screen and accumulate on a pullback.
Jennifer Dowty, Globe Investor's in-house market analyst, writes exclusively for our subscribers at Inside the Market.
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