I’ve been bearish on Cineworld (LSE: CINE) from as far back as when its share price was above 200p. And yes, I confess, also at prices significantly lower than its current 65p!
Today, I’ll explain why I remain bearish on the stock. But hey, it’s not all negativity. I’m also going to compare and contrast Cineworld with a growth stock I’d be very happy to buy.
The pre-pandemic Cineworld share price
Cineworld’s shares had been weak well before the pandemic hit. Between spring 2019 and the end of the year they declined 32%.
Maybe the market shared my concerns about the company’s accounting and governance, or my scepticism about its debt-fuelled empire building. Particularly its entry into the North American market, where movie-theatre attendance has been in decline for two decades. Its mega-purchase of US number-two chain Regal smacked of a vanity acquisition to me.
By contrast, I’ve found nothing particularly perplexing about Cineworld’s small-cap peer Everyman Media (LSE: EMAN). Its largely organic growth strategy has been well-paced and prudently managed. As such, its financial position coming into 2020 was far stronger than Cineworld’s.
Everyman’s balance sheet had tangible shareholders’ equity of £44.9m. And its net debt (excluding lease liabilities) of £9.9m was a modest 0.8 times its £12m EBITDA. Cineworld’s tangible shareholders’ equity was negative to the tune of $3.1bn. And its net debt (excluding lease liabilities) of $3.5bn was a scary 3.5 times its $1bn EBITDA.
Mayhem at the movies
When the pandemic hit, Everyman moved early to further strengthen its balance sheet. It raised £17.5m of new equity in an oversubscribed placing. Cineworld’s solution, with its dangerously debt-heavy balance sheet? Borrow more money.
Everyman has served cinema-goers well through the year, opening its venues whenever legally possible. Meanwhile, Cineworld closed its cinemas across the UK and US in early October until further notice.
Last month, the Financial Times claimed Cineworld is looking at “cutting rents and permanently closing UK screens,” via an insolvency process under a CVA (Company Voluntary Arrangement).
Even if it goes down this route, I’m not convinced it’ll be enough to boost results or the Cineworld share price. Given the enormity of its debt, I think a wholesale financial restructuring of the group will be required sooner or later, with painful consequences for existing shareholders.
Cineworld share price versus Everyman share price
Cineworld’s shares are currently trading at a 72% discount to their 52-week high. This compares with Everyman’s discount of 51%. However, for the reasons I’ve discussed, I’m not tempted by the ‘cheap’ Cineworld share price. It remains firmly on my list of stocks to avoid.
Meanwhile, I think Everyman’s 51% discount share price is very attractive. The company’s relative financial robustness, its premium independent positioning, and strong pre-pandemic growth all appeal to me.
I think Everyman would have little difficulty in doing another equity fundraising, if necessary. Indeed, there may be opportunities for it to acquire some attractive venues from, ahem, financially distressed operators. Personally, I’d be happy to buy Everyman shares at their current price, but the Cineworld share price isn’t for me.
