2 consumer goods stocks ‘Best Buys’ from leading analysts

Analysts follow as many as 20 stocks, most of which are rated “buys.” Of those buys, an analyst has one or two special favorites seen as most suitable for new buying. This column is devoted to those one or two favorite “best buys,” this time from the consumer goods industry.

You’ll get no argument from Barry Schwartz that the web has made it easier than ever to download movies. But this in no substitutes for the magical experience of watching a film in a darkened theatre.

The competition for eyeballs is increasing at a dramatic rate,” admits Mr. Schwartz, chief investment officer and portfolio manager for Toronto-based Baskin Financial.

But on a Saturday night, you want to go out. And that can’t be replicated by watching a movie at home on your computer screen.”

Small wonder that Mr. Schwartz likes Cineplex Inc. (CGX-TSX, $40.88), one of Canada’s top movie chains.

But Mr. Schwartz doesn’t like Cineplex simply because it owns movie theatres. He also likes the Toronto-based company because it’s continually coming up with ways to make more money.

Venues prove attractive

Not only, for example, is Cineplex putting up more movie screens, it’s also opening more VIP theatres. And those theatres are attractive.

You’re not sitting next to the masses,” says Mr. Schwartz of the new venues. “You’re sitting in a private theatre where a waiter comes by and asks you what you want.”

And because folks who patronize the VIP sites can order alcohol, as well as gourmet food, they invariably spend more than they would at a regular theatre — no small matter, given that concession sales account for a big chunk of Cineplex’s revenue.

In fact, on concessions alone, the company’s profit margins total almost 80 per cent, says Mr. Schwartz.

Nor is Cineplex content to stop at VIP theatres; indeed, it’s now looking at equipping some of its sites with bowling alleys.

For Mr. Schwartz, Cineplex is a best buy — one that has consistently raised its dividend since it first went public.

Theatres attract 77 million moviegoers a year

With more than 160 theatres across Canada, Cineplex boasts 1,630 screens, serving roughly 77 million moviegoers a year.

Besides Cineplex Odeon, the company also does business under the SilverCity, Galaxy Cinemas and Famous Players brands.

For the three months ended March 31, Cineplex’s net income fell to $5.1 million, or $0.08 a share, from $8.8 million, or $0.14 a share, for the similar period in 2013.

Revenue, though, was higher, rising $31.9 million, or 12.9 per cent, to $280 million, while pre-tax income tumbled $4.9 million, or 55.7 per cent, to $6.5 million.

Mr. Schwartz may like an outfit such as Cineplex that supplies entertainment. But he also has a soft spot for a company like KP Tissue Inc. (KPT-TSX, $15.19) of Mississauga, Ont. whose stock in trade, toilet paper, is a basic necessity.

For one thing, he says, toilet tissue is obviously something for which there will always be a demand.

This is not a product that will ever be replicated by the Internet,” says Mr. Schwartz. “You don’t have to worry about this type of product not being around in 10 years.”

Moreover, the company, having built a factory in the U.S. to turn out tissue under private labels, is slowly, but surely, getting business.

Indeed, by the end of fiscal 2015, KP is likely to generate $150 million in EBITDA (earnings before interest, taxes, depreciation and amortization), predicts Mr. Schwartz.

And very little of that amount will be needed by the company to maintain its business.

Dividend yield is 4.7 per cent

In the meantime, KP pays a hefty yearly dividend of $0.72 a share, equating to a strong yield — namely, 4.7 per cent.

For Mr. Schwartz, KP Tissue is also a best buy.

In addition to toilet paper, KP Tissue turns out both paper towels and facial tissue.

For the 13 weeks ended March 30, KP Tissue swung to a net loss of $3.2 million from net earnings of $11.7 million, for the similar period in 2013.

Operating income was also lower, falling $5.4 million, or 30.3 per cent, to $12.4 million, while total comprehensive income tumbled $21 million, or 72.9 per cent, to $7.8 million.

KP’s sales costs, however, were higher, climbing $15.7 million, or 8.6 per cent, to $198.9 million, while sales, general and administrative expenses fell $259,000, or 1.2 per cent, to $20.5 million.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846