So far just a few months into 2021, the Cineworld (LSE: CINE) share price is up by around 75%. Shares in the cinema group have benefited from being supremely cheap and being a potential beneficiary of the easing of lockdown restrictions, particularly in the UK.
To me though, Cineworld still seems like a company with a bleak future. That’s why I think the share price rise is overdone.
Challenges for the Cineworld share price
The big challenge is a structural one. As streaming rises in popularity and cinemas possibly get worse deals with film studios, it becomes harder and harder to make the business model work. The future of film lies with Netflix and its competitors, not with Cineworld, in my view. Therefore, there’s only so much investors can possibly be willing to pay to buy in to a company that’s in long-term decline.
When I add on top of that Cineworld’s huge debt, it’s clear the group has a major problem. The debt is around $5bn. That’s far larger than the market cap of the company, even after the recent share price revival.
Institutional investors recognise this, which is why even in the era of Reddit investors and short squeezing, they are confident enough to short the stock. In other words, there are hedge funds betting the shares will fall in value.
Possible reasons to buy Cineworld shares
Probably the only reason to buy shares in Cineworld is as a play on a consumer spending-led recovery from the pandemic. A recovery when it comes would very likely include significant leisure and entertainment spending.
So, could the share price rise be sustained?
Possibly. It’s clear if the roadmap out of lockdown progresses as planned then value shares like Cineworld could do well. Longer term though, I don’t see it as a good investment for the reasons outlined above. For me, the cons far outweigh the pros when it comes to the Cineworld share price.
A better alternative
When looking for a share that can better bounce back from being hit hard by Covid, I’d look instead at shares in Informa (LSE: INF). The group is well known for its conferences, which have obviously been dented by the pandemic.
However, the subscriptions part of the business (which includes research journals and data services) should continue to grow. That part of the business can grow regardless of the pandemic, so is more resilient and diversifies Informa’s earnings. Subscriptions created £300m of adjusted operating profit for the group in 2020.
Conferences should bounce back post-pandemic too.
But there’s a big risk for the company in this area. Businesses now are used to not having to attend expensive conferences. It’s possible they may well have re-allocated budget to other activity. They’ve also very likely found digital solutions for networking, sales, marketing and other business development, which may have worked for them and been cost-effective. It doesn’t mean they won’t attend future events, but such events may be less lucrative. Whether that’s the case is one of the post-crisis unknowns at present.
Despite those challenges, I’d be more confident adding Informa to my portfolio than I would Cineworld.
