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.

Amazing stock performance from a dinosaur – Cineplex

(I had initially written this entire draft on May 3, 2014 and forgot to hit the “Publish” button when done since I had to rush off to do something else… subsequent to this post, they announced a fairly tepid quarterly result and the stock went down to about $39/share. I have not revised the content of this post, but really, I did write this five days ago!).

Was doing some simple research today. Found this company with the following five-year chart:

cgx

Anything since 2009 has performed well, but this one has gone up nearly in a straight line by about 2.6 times – 22% compounded annually for those interested in that figure.

What’s the company? Cineplex (TSX: CGX).

Intuitively if you had presented me the equity case for this company 5 years ago I would have laughed at you – who the heck goes to movie theaters in these days with Blueray and DVD’s, home theaters, video games, and just almost anything else than sitting in a dark air conditioned room for two hours with a bunch of teenagers armed with noisy cell phones?

The answer is – more than I was expecting. The corporation in 2013 made $660 million in box office revenues and about $110 million in revenues contaminating the minds of its customers with pre-movie commercial advertising. This is in addition to other revenues selling overpriced junk food and the usual sort of things you’d expect from a theater company. At the end of the day, they booked $83 million in income, or about $1.32/share.

Balance sheet-wise, they have a little bit of debt, but it is not ridiculously high (about equal to their 2013 cash flows through operations). The corporation is still in an acquisition mode, consolidating what was previous a fragmented market of small players. As one might expect with a consolidator company, tangible book value is deeply in the negative (about $160 million negative). They pay a monthly dividend of 12 cents per share, or $1.44 annually (roughly $88 million in 2013).

So the stock, at about $41/share or a market cap of $2.6 billion (63 million shares outstanding), isn’t exactly cheap. It would have to go down considerably before I would even be remotely interested in it. But I was just amazed that this business is still afloat in the 21st century and apparently thriving. These sorts of businesses shouldn’t be surviving the internet age.

I always keep in mind to never mix my own consumer preferences with those of others. This is one classic case.

Or perhaps there is a short sale thesis here? I won’t do it, but perhaps somebody else there might look at it.