The Motley Fool

Is this 7% yield FTSE 250 stock too good to miss or too good to be true?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

question marks written reminders tickets
Image source: Getty Images

Cineworld (LSE: CINE) is a FTSE 250 company whose share price has declined from its previous high. However, City brokers are forecasting good earnings and dividend growth this year and beyond. Such situations can be a great opportunity to buy into a growing business at a bargain price.

Cineworld trades at just 8 times forward earnings with a 7% dividend yield. Should investors jump in? Or is the valuation simply too good to be true? Here, I’ll discuss why I think the market is rating the stock so cheaply. And whether I think it’s a bargain buy or one to avoid.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Growth

Cineworld was floated on the stock market at 170p a share in 2007. It was a small-cap company, valued at £241m. Today, the share price is 183p and the market capitalisation is £2.5bn.

The reason for the much larger increase in the market cap than the share price is that Cineworld issued shedloads of new shares (from 142m at flotation to 1.4bn today). It did this to raise cash for acquisitions.

Two years ago, it completed a $3.6bn reverse takeover of Regal Entertainment in the US. Yesterday, shareholders also approved a $2.1bn takeover of Canada’s largest operator, Cineplex.

Falling ticket sales

Cineworld’s management has certainly shown ambition. But I think the market may see a danger of, in the words of Macbeth, “vaulting ambition, which o’erleaps itself.” For one thing, the company has taken on a welter of debt. For another, cinema attendance in North America appears to be in structural decline, with a two-decade trend of falling ticket sales.

Notably, ever fewer teenagers and young adults – historically, the biggest demographic of movie-goers – are visiting cinemas. Studies show this is true not only of North America, but also other major markets, like the UK and Germany. The fact that cinema-going habits are formed young and remain as we age is a big concern for the future.

Bucephalus

I’ve written before about Cineworld’s high level of debt ($3.3bn, and gearing of 3.3 times EBITDA). I also suggested debt may be one of the reasons why Cineworld is one of the most heavily shorted stocks on the London market.

Debt isn’t the only reason, according to Bucephalus Research Partnership, which specialises in identifying companies where it believes creative accounting is shielding a weak underlying business.

I haven’t yet managed to get hold of Bucephalus’s report – titled ‘Cineworld: Looking like a horror show’ – but there’s a six-minute summary presentation on the research firm’s YouTube channel.

Among other things, it reckons Cineworld has “taken full advantage of the Regal deal and the change in lease accounting to get extremely creative … This has flattered their growth, buried costs, inflated margins, and obscured $2bn of debt and liabilities from the balance sheet.”

Bucephalus suggests Cineworld’s gearing – on a true view – is absolutely eye-watering. Namely, over 9 times EBITDA.

Bottom line

Even if I dismiss Bucephalus’s analysis, I still see Cineworld as a stock to avoid. I don’t like the headwinds of declining cinema attendance in North America, and among young people across many major markets. On top of that, the company’s debt and gearing (on management’s own presentation of the accounts) are too high for my liking, as are the sheer number and weight of short positions in the stock. There are better high-yield prospects around, I say.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.