The progress of an inactive portfolio and irreverent thoughts on Cineplex equity

Since May, I have not made any trades beyond consequential ones stemming from the liquidation of KCG (which was bought out for $20/share).

This period of inactivity (three months) has been quite a dry streak in terms of transactional volume. My brokerage firms will probably not like it – the last time I had trade volume (in terms of commissions spent) this low was in 2012 (where my performance was +2.0% for the year). In terms of a fraction of assets under management, it is at a level where even Vanguard would blush at the expense ratio.

My portfolio, quarter-to-date, is up a slight fraction simply due to the resolution of the TK situation and offset negatively by the rise in the Canadian dollar. I’m a bit mystified at the rise of the dollar, but I’m guessing this is something geopolitical resulting from the actions of the US government administration.

One stock that caught the attention of my radar is the plunge in Cineplex (TSX: CGX):

I am going to be apologizing to all CGX shareholders in confessing that I am the reason why the stock price has crashed. The reason? On July 31st, I saw War for the Planet of the Apes at a Cineplex theatre. Graphics were great, but it was an awful movie! Sorry, shareholders!

I wrote over three years ago that I was mystified how the stock was trading so high when it is perfectly obvious that movie theatres are basically going the way of Blockbuster Video. I also do not like it how customers are relentlessly spammed for a good half hour before the actual movie is going to start – I think in our age of explicit advertisement avoidance, this is a net negative. As I wrote before, even at present price levels I would not be interested.

8 thoughts on “The progress of an inactive portfolio and irreverent thoughts on Cineplex equity”

  1. I remember seeing a presentation by Baskin Financial about Cineplex. In one of the slide they showed a chart of much money they make per ticket sale. It was really impressive to see the increase over the year, I mean how much is it for a piece of pizza in one of their theater now ?

    I still didn’t buy, simply because I thought that at some point they would hit a ceiling and It would not compensate for the loss of clients.

  2. The trendline (at least for movie receipts) appears to track inflation (just eyeballing it, about 2.5% a year), which isn’t bad in terms of pricing power.

    I think there is a peak to this, however – even when they try putting in extra “value-added” like 3D, and Imax, and the like, there’s a ceiling to what people really want to pay. I haven’t seen a 3D movie where I thought it was really worth the 3D effect (even Avatar).

    I thought 25 times earnings for CGX was insanity when it should be priced as a boring, stagnating industry stock (so let’s say 15 times FCF), which would put the mid-range of a paper napkin valuation at around $30/share. It’d have to get lower before I’d even get interested. The amazing thing is how it even got up to $54 in the first place.

  3. The only real justification of Cineplex as an investment ha been that they are the only publicly traded exposure to theatres, and they have pricing power (“look at how much they charge for popcorn!”). With little to no discussion about the possibility of decline. That’s how I knew I could discount those expert opinions.

    Now they seem to be becoming a Chuck E. Cheese slash theatre hybrid, and that will offer different economics, but I still doubt it justifies more than a 18x P/FCF multiple.

  4. @Tyler: I really like the Chuck E. Cheese analogy (they’re privately owned but publicly reporting – They make a slim amount money in relation to revenues but more than their bottom-line profit is sucked up in interest expenses (probably to the related owner). I really wonder if places like Gameworks (USA) are at all profitable.

  5. I think the fact that Gameworks is being acquired by a SPAC in a complicated transaction involving another interactive game co, and that this transaction is being held up at least in part because of audit difficulties, speaks poorly to its current profitability and future prospects.!

  6. Hi Sacha,

    I remember making note of your comments on Cineplex last summer. Sure enough, the compression has taken it down to $29-30.

    Does this change your views on the company or are you still of the mindset that this is going the way of Blockbuster.

    Thanks. Love the site.

  7. Blockbuster was hyperbole, but I do think the future of movie theatres is going to be quite limited in the age of Netflix and on-demand media saturation. CGX will have time to strategically pivot into something but it is not going to be a pleasant transition – just pay attention to that “box office” section in their revenues. Yellow Pages is a better analogy than Blockbuster.

    At $29-30/share I’m still completely uninterested. In fact I’m wondering why their 4.5% unsecured debentures are still trading above par, but I’ll leave that as an exercise to the reader.

Leave a Reply

Your email address will not be published. Required fields are marked *