In hindsight, the pandemic’s impact on the stock market may appear quite short-lived. Consider Cineworld (LSE: CINE). Earlier this week, the Cineworld share price zoomed past 100p and has stayed at these levels since.
Let me put this in perspective.
Just before the stock market rally started in November last year, the Cineworld share price was at around 25p. It has risen by more than four times since. Let me give even more perspective.
The Cineworld share price is now back to its pre-stock market crash levels of March, 2020. In other words, if it maintains these levels, the company’s share would have successfully managed to put the stock market crash behind it.
Going by how much CINE has suffered during the pandemic, this would have appeared unlikely even six months ago. This is why I said at the beginning that the stock market impact of Covid-19 may appear short-lived when we look back.
Positives for the Cineworld share price
But we do not know that for certain yet. When the economy reopens, we will know for sure how far business comes back to life.
I am optimistic though. Over 70% of Cineworld’s revenues are generated in the US. The US economy grew by a strong 4.1% in the last quarter of 2020. Its growth boom is expected to continue this year as well. If President Biden’s fiscal stimulus of $1.9trn comes in, the surge in the economy could be well beyond what is expected now.
Where the money goes is also important. As long as it finds its way to low-to-middle income households, as is expected, spending could increase substantially.
This in turn, would be good for entertainment companies like Cineworld. Cinema is a relatively inexpensive form of entertainment, which goes in its favour.
Moreover, there is a lot of pent-up-demand for recreation. A good example of this is the surge in holiday travel bookings easyJet saw as soon as the phased end to the UK’s lockdown was announced recently.
What can go wrong
The US fiscal stimulus plan isn’t certain, nor is it certain that it will have the intended effect. And a year of pandemic living, including uncertain income may encourage us to focus more on saving, which could have a negative effect on Cineworld’s profits.
I am also concerned Cineworld’s debt levels. They were already high pre-pandemic and are higher still now. I think it is safe to assume that it will be a while before it can pay off its loans. The good thing, though, is this. I reckon creditors will be understanding right now. And if we are talking of a roaring ‘20s comeback, this may well be the best time there is for Cineworld to get out of its funk and get its finances back on track.
But I think it is important to remember that even pre-Covid 19, the Cineworld share price was falling. I think it is time to start thinking about why it got into that position again.
The takeaway
I think it would be beneficial in this case to check share price forecasts given the already sharp run-up in share price. I am making some calculations of my own right now to see how far the Cineworld share price might go.
