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Sep 1, 2017

7 reasons why this summer was one to forget for Cineplex

The bull and bear cases for Cineplex

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Shares of Cineplex (CGX.TO) have lost about 25 per cent of their value since the official start of the summer, bringing the stock to a level not seen since 2013. Here are seven reasons it's been a summer to forget for the theatre operator.

BOX OFFICE BLUES 

Although Cineplex has been making headway in its diversification efforts, the box office still accounts for close to half of its overall revenue and the company has had some tough comparions to top this year. 2016 featured a number of blockbuster hits such as "Deadpool", "Captain America: Civil War", "Finding Dory" and "Zootopia," two of which were screening during the summer last year. The major success of these movies translated into a much weaker showing for this year's results. The lack of blockbusters also meant weaker revenues at the popcorn stand. Cineplex suffered a number of analyst rating and price target downgrades in the past few months because of a softer box office outlook. 

RECLINERS 

Part of Cineplex's bid to move up the value-added chain has been to outfit its theatres with reclining seats so it can charge more for those admission tickets. However, Jeff Fan, an analyst at Scotiabank, says Cineplex had to take 33 screens offline in its most recent quarter to retrofit the theatres with recliners. Fan estimates second quarter year-over-year attendance growth would have been about flat if the screens were kept in play instead of the 3.1 per cent decline Cineplex reported in the quarter. It should be noted though, Echelon Wealth Partners analyst Rob Goff thinks the company will reap the benefits from these recliner retrofits in the future as U.S. peers who have installed the new seating have experienced attendance growth and higher ticket prices.



VIDEO-ON-DEMAND 

Talk from Hollywood studios about launching their own Premium Video on Demand services has been intensifying as movie-makers look to compete with Netflix. It adds another layer to the threat of consumers staying home to watch films instead of heading to the theatre. Premium Video on Demand would likely shorten the amount of time a movie plays on the big screen before consumers can watch it from home. Fan says while this is mainly an American cinema issue for the time being, it has brought “headline risk” to Cineplex. 

Cineplex is 'de-worse-fying' instead of diversifying: Lightwater Partners

Jerome Hass, portfolio manager at Lightwater Partners, joins BNN's Catherine Murray for a look at the continued slump in North America's box office stocks, why the industry is up in arms with MoviePass' plans to offer US$10/month movie-viewing in the U.S. and why Cineplex is making tweaks to its loyalty rewards program.

MAYWEATHER-MCGREGOR

The widely anticipated fight between Floyd Mayweather and Conor McGregor likely contributed to the dismal box office releases, Goff told BNN in an email. Some pre-fight estimates said about 1 in 6 Americans could tune in to watch the fight, meaning people would likely be going to bars or staying home to watch the boxing match, keeping them out of the movie theatre. He said this could have been a factor for studios to hold off on releasing new films.

MEDIA

Although Cineplex's media segment only accounts for a small portion of its revenue pie, it had been a bright spot for the company and a solid source of growth until recently. The division, which consists of in-theatre advertising and digital display boards, posted a nine per cent decline in the second quarter as more businesses chose to advertise on television during the NHL playoffs and digital media installations hit a snag pushing out the estimated completion time. National Bank analyst Adam Shine doesn't think the division is out of the woods just yet. "A difficult advertising backdrop has started to impact Cineplex Media where we now expect [further] declines in [the third quarter] ahead of [fourth quarter] growth," he wrote in a July 13 note to clients.



REC ROOM COSTS

Cineplex's ongoing efforts to branch out from the movie theatre business includes the construction of giant entertainment centres called Rec Rooms. However, multiple analysts say various costs associated with opening new locations are higher than expected and will weigh on Rec Room margins. Cineplex has opened a Rec Room in Edmonton and Toronto so far this year and is aiming to cut the ribbon on 10-15 other new locations within the next few years.

SYMPATHY 

Cineplex's American peers have taken a beating in recent months and it's likely weighing on Cineplex's stock. AMC, Regal Entertainment and Cinemark shares have dropped anywhere from 20 to about 40 per cent since the beginning of the summer as concerns grow over disappointing U.S. box office sales, Netflix original film content and talk of Hollywood studios launching their own premium video-on-demand services. Fan points out Cineplex's multiple has fallen about 10 per cent compared to six months ago while its U.S. exhibitor peers have suffered multiple contractions of about 20-25 per cent.