This article was originally published on Opto – Understand What Really Moves Markets.
After hitting an all-time low, Cineworld’s [CINE] share price clawed back some of its losses, rallying a massive 439% to close at 99.44p on 8 June. The recovery was driven by news that cinemas would be reopening their doors across the UK in late July.
The reprieve was short-lived, however, as an increasing number of blockbuster film delays put off moviegoers, sending Cineworld’s share price down 36% to 38p by the end of July.
The release of two blockbusters — Warner Bros’ Tenet and Disney’s Mulan — in late August and September received an underwhelming reception, leading Cineworld’s share price to decline 31% during the month to 42.92p on 21 September.
Given the weakened film line up, will the company’s earnings report — expected on 24 September — help Cineworld’s share price?
Even before the coronavirus pandemic, Cineworld’s share price had begun to lose its shine despite being the second-largest cinema chain in the world.
For the year ended 31 December, Cineworld had net debts of $3.5bn. This concerned investors given that the company was considering acquiring Canadian cinema chain Cineplex with a $2bn loan. Cineworld’s share price ended 2019 down 5.7%.
Rising debt fears grew in March, when Cineworld warned that if it lost up to three months of revenue due to cinema closures, it could be at risk of breaching its debt covenants.
It came as no surprise when Cineworld outlined its coronavirus plan in its 2019 annual results, released in April. These included a slew of capital-raising measures including a salary deferral for executives and a dividend cut.
The group missed analysts’ expectations after announcing a 6% year-over-year fall in revenue to $4.3bn and a 36% year-over-year decline in profits to $180m.
The weakened balance sheet, coupled with the fact that it had to close all 787 of its cinemas across 10 countries as a result of COVID-19, left Cineworld with no option but to take aggressive cash preservation measures.
While most investors have become accustomed to companies suspending dividends this year — the movie theatre operator has said it won’t pay any in 2020 — some analysts believe Cineworld’s share price has been left fragile.
Roland Head wrote in The Motley Fool that the company’s current debt levels “are unlikely to be sustainable without some kind of refinancing”.
A bargain buy?
Head advises avoiding the stock, but also noted that Cineworld’s share price looks cheap at the moment.
As of 21 September’s close, the stock trades 81.8% off its 52-week high of 235.20p, giving it a trailing P/E of 4.38.
Although the outlook for cinema, and Cineworld’s share price, doesn’t look great, the industry is not expected to simply disappear.
“It is worth noting that predictions for the death of cinema have been made before, notably in the 1950s and 1980s when the advent of TV and home video respectively led to declines in admissions, but the industry ultimately recovered. Cineworld and its investors will be hoping for a repeat this time,” Russ Mould, investment director at AJ Bell, wrote in a note to clients in April, according to Morningstar.
According to analysts polled by Simply Wall Street, the group is expected to post revenues of $2.38bn for 2020.
Meanwhile Peel Hunt is forecasting a more downbeat estimate of between $1.1bn and $318m, according to ShareCast.
The firm expects Cineworld will trade at worst on a cash-neutral basis from September and end the year with $240m in cash. It rates the stock a Buy.
The consensus among 13 Wall Street analysts polled by MarketBeat also rate the stock a Buy and provide a price target of 245p.
Ultimately, just how bad Cineworld’s financial state really is will be of crucial interest to investors trying to determine whether to make a long-term bet on its recovery.
The Essential Stock Market Digest: Join 30,000+ Opto subscribers getting market-moving news direct to their inbox, 4 x a week.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. View our full disclaimer, here.
Guest Author at MyWallSt
The investment universe is changing beyond all recognition, and with a thematic focus, investors can capitalise on this wholesale disruption. From Genomics to Artificial Intelligence, disruptive innovation empowers companies to displace industry incumbents, and secure majority market share. Opto exists to identify those businesses, and help investors to invest in the next big idea.