Cineworld Group (LSE: CINE) shareholders have reason for optimism this week. Moves to reopen cinemas in the US were already underway. And planned further relaxation of the UK’s strict lockdown rules give hope for the business opening again here. The Cineworld share price responded with a 19% jump on Tuesday. And by mid-afternoon Wednesday, we’re looking at a further 15%.
Before we get excited about what might seem like a rapid growth stock, let’s look back. So far in 2020, the Cineworld share price is still down 63%. The shares had been struggling even before the Covid-19 crisis struck, losing 74% from a peak in April 2019.
Cineworld is the world’s second-largest cinema chain. And some of the bearishness will have come from fears of increasing competition from streaming services. But even with that, cinema is still in good demand, and plenty of folks still like to go out for their entertainment. No matter how good home streaming can be, I don’t think it comes close to the experience of a cinema showing.
I think a lot of the recent stagnation in the Cineworld share price has simply been a needed correction. Prior to the slump, Cineworld shares had been trading on price-to-earnings multiples of around 35. That’s when earnings per share had been a bit erratic year on year, too. And that kind of valuation looks to be ultimately unsustainable for anything other than a very strong growth stock.
Cash preservation
Since the coronavirus struck, Cineworld has suspended its dividend, along with many others in the market. That will have led to a lot of income investors dumping the stock, and moving to more sustainable yields. But it was necessary, as Cineworld is among the companies whose businesses were totally halted. On 7 April, the firm told us that “The group’s entire estate of 787 cinemas in 10 countries has been closed as a result of COVID-19“.
Directors had “voluntarily agreed to defer payment of their full salaries and any bonuses“, and the focus was on cash preservation.
At the depths of its crisis, in mid-March, the Cineworld share price had crashed by 90% year-to-date. And that, if ever I saw one, was a stock priced to go bust. The company’s balance sheet wasn’t looking too safe either. Full-year results delivered in March had revealed $3.5bn in net debt. That was down from $3.7bn a year previously, and from $4.0bn at the time of the Regal acquisition in February 2018. But still potentially devastating.
Cineworld share price
I really can see the fears investors faced when they looked at all of that. And the Cineworld share price dropped to the levels of a nearly dead company. Had the total lockdown continued for a year, or even six months, I could have seen the end of Cineworld. And a lot of other companies too. But it looks like it’s going to be a lot shorter than that.
And when such a company defies the pessimism and shows sparks of life, the share price can quickly shoot back up again. It’s too hard to put an accurate long-term valuation on the Cineworld share price. But I think a fair valuation would be a good bit higher than today’s price. I’d buy.
