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No More Rate Hikes! Here’s Why I’m Buying Cineplex Stock

man is enthralled with a movie in a theater
Source: Getty Images

Written by Ambrose O'Callaghan at The Motley Fool Canada

On Wednesday, April 12, the Bank of Canada (BoC) announced that it would hold the benchmark interest rate at 4.5%. That has been the benchmark rate since January 2022. BoC governor Tiff Macklem maintained that the central bank would stay the course with its restrictive monetary policy, as risks to the economy remained present.

Today, I want to discuss why I’m looking to snatch up a stock like Cineplex (TSX:CGX) in this interest rate environment. Let’s jump in.

What does a rate-hike pause mean for investors right now?

The pause on interest rate hikes may give investors and consumers alike some time to regroup after a period of extremely aggressive hikes in 2022. Canadian stocks were broadly hit by volatility in the spring of 2022, and the S&P/TSX Composite Index has still failed to reclaim its March 2022 highs.

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In my recent pieces, I’d discussed the industries that could benefit in a high interest rate environment. Bank stocks have been hit by volatility in this market. However, Canada’s top banks have benefited from improved profit margins due to interest rate hikes. That means investors should not see this as a time to stray from Canada’s profit machines.

What has spurred me to look at Cineplex in this climate? Consumer discretionary stocks can also perform well in the face of higher interest rates on the back of higher employment. Moreover, we should not underestimate the recent successes that have populated the cinema.

Here’s why the cinema industry may be on the comeback trail…

This year has seen three films break through the $200 million domestic mark so far. Ant-Man and the Wasp: Quantumania raked in $212 million domestically following a February 17th release. Meanwhile, Avatar: The Way of Water continued its impressive momentum after its December 2022 release and gobbled up $282 million domestically so far in 2023. However, The Super Mario Bros. Movie has blown past expectations for Universal Pictures. The movie based on the long-standing video game series has generated $358 million at the domestic box office so far after an April 5th release date. It is well on its way to a global gross that should exceed $1 billion.

There are some promising movies on deck for Cineplex and its peers, as we look ahead to the spring and summer blockbuster seasons in 2023. Movies like Guardians of the Galaxy: Vol 3, the live action adaptation of The Little Mermaid, Indiana Jones and the Dial of Destiny, and the Barbie movie all hold tremendous potential to deliver big on the domestic box office in the months ahead.

In fiscal 2022, Cineplex achieved total revenue growth of 93% to $1.26 billion. Meanwhile, box office and concession revenues per patron climbed 3% and 10%, respectively, compared to the previous year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 320% to $251 million for fiscal 2022.

Cineplex: Why I’m Buying this stock in April

Shares of Cineplex have jumped 14% month over month as of close on April 18. The stock is now up 11% in the year-to-date period. However, shares of Cineplex are still down 34% year over year.

Cineplex is facing challenges ahead, but it is on track for solid revenue growth going forward. Moreover, it has climbed back to profitability and is trading in favourable value territory compared to its industry peers. I like Cineplex as a contrarian pick in the current climate.

The post No More Rate Hikes! Here’s Why I’m Buying Cineplex Stock appeared first on The Motley Fool Canada.

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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool recommends Cineplex. The Motley Fool has a disclosure policy.

2023