I have been bullish about cinema operator Cineworld (LSE: CINE) for some time now. Somehow or the other though, I have missed out on buying the stock so far.
Now, however, I would like to buy it before I start feeling like I missed an opportunity. The Cineworld share price has crashed 30% in the past two months. An investor less convinced of this FTSE 250 stock’s merits may want to take a step back on learning this.
But I have been following the stock for a while now. And I think there is much potential in it. Consider this.
Why the Cineworld share can rise
It has indeed fallen in recent months, but the Cineworld share is still up 55% over the past year. This reflects that investors still have faith in the stock.
In the US, which accounts for much of Cineworld’s revenues, cinemas opened in April. In the UK, which is the cinema chain’s other significant market, reopening happened more recently on 17 May. These are a steps in the right direction, even though social distancing measures may not allow them to rake in profits immediately.
But as vaccinations proceed, I think we should expect relaxed regulations and greater footfall in cinemas. In its recent results, for the calendar year 2020, Cineworld mentions pent-up demand. FTSE companies with sectors that are reopening often talk about this as a potential driver of future growth.
There are already signs of this happening for Cineworld. The company points to encouraging trends for the industry in countries like China, Japan, and Australia, which have led easing in lockdowns globally.
As an investor who always has an eye on macroeconomic factors, I also find economic growth projections encouraging. According to Deutsche Bank research, increased savings in the UK can lead to higher consumption after the lockdowns, which bodes well too. Additionally, I think that cinemas can also be boosted if middle-class incomes rise in the US, which is a stated policy objective of high government spending.
Stumbling blocks ahead
There are still challenges ahead for Cineworld, to be sure. The company’s high debt levels were a downer even before the pandemic, and now they are a bigger problem. While signs are hopeful that we have put the worst of Covid-19 behind us, we cannot be too sure too soon. And the likes of cinemas are the first ones to be impacted by any new threats.
My takeaway
Yet, I find Cineworld’s strong credentials hard to dismiss. 2020 was the first year ever that it made a loss. And it is the second largest cinema chain in the world. Further, while many other reopening stocks have raced ahead, Cineworld’s share price is still a fraction of its pre-pandemic levels.
With its share price having tumbled from its recent highs, it may once again look like a contrarian investment. But I would not miss out on buying the stock this time.
