Leading cinema chain Cineworld (LSE: CINE) releases its interim earnings tomorrow. Its last financial update was for the full-year 2020. The next one will cover the first six months of 2021.
What to expect from Cineworld’s earnings update?
I reckon these numbers will still be lower than 2019 figures, since cinemas reopened only in the second quarter of 2021. However, they could have improved from last year, going by AMC Entertainment’s recently released figures. This is because the US market is a big one for both cinema chains.
AMC’s half-year results certainly showed significantly improved revenues compared to 2020. This was partly because of the lifting in lockdowns, but also the box office performance of recent action-thriller movies too. Also, it pointed to consumer spending on food and beverages, which accounts for more than a third of its revenues.
I also expect encouraging revenues because Cineworld already reported a strong opening for Peter Rabbit 2: The Runaway when cinemas reopened in the UK in May. It also confirmed that most of its US cinemas had also opened. It would remain loss-making, though I think.
Cineworld share price trends are not as bad as they seem
On the whole, I reckon the numbers will be positive for the stock that has really been going through it. After touching levels of 120p in March, the Cineworld share price has been dropping. It has lost half of this value already.
But here are two aspects to chew one. One, despite the decline, its share price is still a whole 20% higher than that a year ago. Two, since the market crash of March 2020, its share price is up threefold.
But what about the debt?
I do get that Cineworld is sitting on a pile of debt. But this has also been a most atypical time. Coronavirus-impacted stocks from airlines to hotels have seen share price increases that are hard to justify looking at their fundamentals. Cineworld is another one of them.
But, I think its stock gets more than its fair share of flak because it was already hugely indebted before the pandemic, ever since it acquired the US-based Regal Cinemas in 2019. Covid-19 added to this. It does make it a riskier stock. But because of the existing debt pile, not because coronavirus suddenly added $4.5bn to it.
What these numbers do underline for me, is the risks in making acquisitions by taking on big debts. We just never know when times will change and the debts become unsustainable.
Why I like the Cineworld stock
But the same logic flows in reverse too. An economic boom can wipe out its woes fast. If the economy starts growing like it did in the mid-2000s or indeed the ‘Roaring 20s’, I doubt if Cineworld’s debt will look quite as large in comparison to its market valuations or fundamentals.
I have already bought the stock, and as far as I am bullish on the economy, it continues to look like a good buy.
