Why Cineplex Stock Will Be a High Volatility Trade

The pandemic has not been kind to the cinema industry, with strict social distancing restrictions in place. This has led to several movie releases being delayed. According to PWC, the $2.1 trillion global media and entertainment industry saw the box office revenue shrink by 65.9% year over year in 2020. However, as the world slowly recovers with vaccine rollouts and theatres open in limited capacities, Cineplex Inc. (TSX:CGX) stock might be one to look out for.

While Cineplex saw its shares fall by 60% in total since its peak, the third week of February 2021 saw the stock price jump by 13%. I believe this volatility directly translates to the fact that Cineplex has a ton of momentum right now.

So, here’s my take on why this stock shows such a trend and if it’s too risky to invest in it right now.

More film delays may be catastrophic

In its Q4 earnings call, Cineplex reported attendance of just 786K, which led to an 88% revenue decline during this period. It also spent about $24.8 million per month in this quarter and had to sell its headquarters in December to generate cash and pay debts.

Its EBITDA margin currently stands at a 44% loss, while total outstanding debt stands at about $1.79 billion.

In all honesty, I don’t think these numbers are shocking, as theatres will be the last place that opens at total capacity even with full-fledged vaccine rollouts. However, delays in any more big releases might spell disaster for the company stocks, which heavily relies on foot traffic to generate revenues.

Blowout bond deals may be a silver lining

Cineplex enjoyed strong demand from investors wanting to ride the economic recovery trade and sold unrated bonds worth $250 million at a lower yield. This deal comes after COVID-19 vaccination campaigns ramped up worldwide, leading to investors positioning them for a post-pandemic reopening.

I feel this is a bold move, considering that Canada has lagged on the vaccination front compared to other western countries. However, this might be the liquidity boost it requires to bridge the gap between now and post-recovery.

Bottom line

This Toronto-based multiplex chain currently has a market cap of $766 million. From the market functioning perspective, blowout bond deals are an indication that even businesses directly affected by COVID can access capital.

However, those betting on Cineplex stock can expect high volatility levels on the upside or downside. As such, predicting which way this stock will go is difficult. Hence, I think conservative long-term investors should steer clear of this stock for now and wait out the parabolic trend.

The post Why Cineplex Stock Will Be a High Volatility Trade appeared first on The Motley Fool Canada.

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Fool contributor Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool recommends CINEPLEX INC.

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