Cineplex Inc (CGX.TO)

Long Cinemark CNK-N/ Short Cineplex CGX-T. Pairs trade. Feels Cineplex is an overowned/overvalued name at 77% market share in Canada. Cinemark trades at 30% discount. The pairs trade takes out the box office risk.

By and large, this has been pretty expensive. It has come down some. They have some interesting things transpiring. They are building out a new restaurant/entertainment centre, which he thinks is going to be a success. Have been doing a really good job of developing their other businesses. Trading at a level that is slightly below their 5 year average.

An analyst downgraded this and the stock cratered. Jurassic Park gave them a record box office this weekend. The box office in the US is the highest it has been year-to-date for the past 5 years. They are using their significant free cash flow to get into a new line of business. Do a great job of raising the prices and making people pay more for the concession food. Dividend yield of 3.27%.

(A Top Pick June 3/14. Up 24.34%.) Still likes this. Have been very good at driving up concession spend. Going forward there is going to be a much stronger movie slate, which will drive traffic into theatres.

(A Top Pick May 27/14. Up 27.93%.) Had a lousy summer with a bunch of disappointing movies. Looks like a really good slate of movies coming up. In the meantime they make money on popcorn. They also have the additional advertising business which is now growing quite rapidly.

This is a stock that all money managers seem to love. To him it is trading at very expensive multiples at around 39X last year’s PE and about 26X this year’s. They are embarking on a new venture called the Rec Room, essentially bars and casual dining within the cinemas. As a consequence, he thinks the stock should be de-rated. Has this in a Pairs Trade with Cinemark (CNK-N), with this one being the Short.

(A Top Pick May 9/14. Up 23.75%.) A popcorn seller that has movie theatres connected to the concession stand. Their latest quarterly report show they did tremendously well on the concessions. Margins on popcorn and soda pop are breathtaking. They are also very good at getting revenue from airlines and advertising in the theatres. Have a huge summer coming up with a number of big blockbusters coming out. He is looking for a big 2015.

A theatre operator with about an 80% share in Canada. Has been a bit weak in the last couple of quarters. Very high quality management. They continue to increase the concession spend through new offerings and making it easier for patrons to buy food. Also, have alternative formats such as VIP, 3-D, IMAX along with off-hour showings like ballet and sporting events. Expecting a pretty strong slate of movies in the back half of this year and going into 2016. Starting to increase the dividend yield which is currently 3.07%.

He is Short this. Doesn’t like its valuation. Trading at forward earnings of about 25X earnings and it has not earned its dividend. They carve out their sort of CapX to get a free cash flow number, otherwise it wouldn’t be able to afford its dividend. There is an issue in the box office right now. The multicasting universe that we have right now, where we can sit on our couch and watch episodes, is really powerful.

(Top Pick Mar 5/14, Up 22.37%) They are going to roll out the rec. room concept this year. Only some of their theaters have them now.

Sold his holdings a couple of years ago. What he had liked was that it was an oligopoly in the movie business. Concessions have been a great thing for them. The Met Opera shows have done incredibly well. They have really experimented with their screens and how to use them effectively, and have done a very good job with that. Pays a nice dividend. The big risk would be whether the blockbuster movies take off. It is hard for him to see where the growth comes from, unless there is a great year in the movie business.

(A Top Pick Feb 5/2014. Up 24.63%.) Movies are still a cheap date and a nice place to take your kids. A lot of seniors go to movies. Last year there were not good movies, but this year everybody is expecting a home run year. So far it has started out very good for them. Every year they raise the price of popcorn. They are diversifying into other areas. Buy on a pullback. There is always potential for it to be taken over. Smart management.

Continues to like it for its prospective dividend growth. As the box office picks up, so will the stock. They have other interesting sidelines such as ‘the recroom’. The PE of 28 is worth it (17 times price to cash flow is what he looks at).

Came out with some great results earlier in the week and the stock crossed $50 for the 1^st time. He is not selling his holdings, but it is a tough buy at these new all-time highs. Multiples have gotten a little bit rich. Very well-managed. Sort of a lacklustre box office in the 4^th quarter, but they still managed to increase revenues. If he saw anything in the mid-$40, he would consider stepping in.

This has been a phenomenal story. It has grown substantially and has consolidated the industry. Execution has been flawless. He looks for above market growth, which this company does have. However, it also trades at above market valuation at around 20X. He wouldn’t buy it here.