Forget the Cineworld share price! I’d buy this growth stock instead

G A Chester explains why he’s not tempted by the 72%-discount Cineworld share price, but sees great value in this half-price growth stock.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »