The event-laden 2022 Oscars ceremony, in addition to the recent Met Gala, showcased some of Hollywood’s finest. Cinema does precisely the same thing for cinemagoers. So, what better time for me to put a cinema stock in the spotlight – Cineworld (LSE:CINE).
It has been a rollercoaster few years for Cineworld shareholders. The last three in particular have seen its valuation go into freefall, dropping over 1,000%, all the way from a high of £319.60 in 2019, to under 30p today.
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A broader theme may be playing a part in the persistent demise of the stock – smartphones. The ubiquity of social media and the 24-hour news cycle means ‘Hollywood’ is not quite as dreamy, or distant, as it once was, while streaming giants have provided us with alternatives to popping to the cinema.
Initially, analysts pointed to the pandemic as a prime reason for the notable share price decline, a period that took a metaphorical sledgehammer to activity within the retail and leisure sector. However, we cannot rest on that excuse. By the time the coronavirus crisis had hit, the company was already grappling with heavy debt on its balance sheet. Analysts had already begun to question its financial situation a year before it was forced to close most of its theatres.
The main challenge to Cineworld’s future growth prospects is its current and sizeable credit obligations, with the lion’s share of the company’s limited resources being used to pay this down, kicking any capital expenditure plans further into the long grass.
Interest rates in the UK and US are only going to increase from here on out, increasing the group’s cost of capital, compounding an already insurmountable debt pile.
A buying opportunity?
The steep fall in Cineworld shares over the past five years will certainly have value investors snooping around. To put this bargain into perspective, Cineworld’s latest 12 months price-to-earnings ratio is -0.9x (as of December 2021). Now let us compare that to the last five years, where the ratio peaked at 1.7x in December 2018.
The stock is only a bargain, however, if there is some upside potential.
Holding Cineworld stock over the long run can make sense if I believe the love affair with Hollywood will continue to prevail, alongside the belief that cinema-going will continue being a popular leisurely pursuit in years to come.
The stock looks extremely cheap, while management concentrating on reducing its debt obligations will free up much needed cash flow to help emerge away from its negative cash position.
But with liquidity preservation top of the group’s agenda, and no dividend policy in sight, I would need to be a very patient, faithful investor to hold this stock for the long haul.
Since I believe the decline in Cineworld stock is symptomatic of a decline in traditional entertainment like cinema and Hollywood in place of shinier, newer social and digital engagement platforms, I will be staying well clear.