“I feel the need: the need for speed”, Tom Cruise’s character Maverick famously said in the 1986 hit film Top Gun. The same cannot be said about the share price of cinema operator Cineworld (LSE: CINE). In the past year, the Cineworld share price has moved with high speed – downwards. It has fallen more than 70% in that time.
Could the release of the blockbuster sequel Top Gun: Maverick bring Cruise-like high-speed acceleration to the Cineworld share price?
Hollywood, you look good!
I think blockbuster films are more important than ever for a cinema chain like Cineworld. Streaming and downloading have taken a big chunk out of cinema audiences over the years. But a well-promoted and highly anticipated release can still tempt people back into the aisles. They may have lost their loving feeling for the silver screen, but Maverick might help bring it back.
I think films like Maverick could also play a role in bringing back customers who last set foot inside a cinema before the pandemic. Once they come back once, they may come back again.
Indeed, in its preliminary results in March, the company namechecked the film as part of “the highly anticipated movie schedule” on which it hoped to capitalise.
The problem with the Cineworld share price
So far, so good. Maverick gave Cruise his biggest ever opening weekend – the best of the best. So it looks likely that it will help provide a significant boost to Cineworld ticket sales. Indeed, the company’s largest market is the US where the film has created widespread buzz.
But the issue with the Cineworld share price is not simply about revenues, or even profits. Last year, after all, revenues more than doubled to $1.8bn and the company returned to the black at the operating level. The real weight dragging down the Cineworld share price is the company’s debt burden. Its net debt grew last year to $4.8bn even excluding lease liabilities. Including those, net debt stood at $8.9bn at the end of the year.
To paraphrase a dressing down given to Maverick in the original, has Cineworld’s acquisition spree been writing cheques its earnings can’t cash? So far, no — the company has done an excellent job of maintaining liquidity in very challenging times. But the cost of that has been the growth in net debt. Paying that down means that even if films like Maverick help the company swing back to a large operating profit, the investment case for Cineworld shares is severely weakened by the company’s balance sheet.
Turn or burn?
Given its dramatic share price fall and improving business outlook, it is possible Cineworld could turn the corner. But I also think its huge debt pile means the shares could ultimately end up crashing and burning if there are further unexpected demand falls in coming years like we saw in the pandemic.
As Jester told Maverick in the original film, “That was some of the best flying I’ve seen to date — right up to the part where you got killed“. I am impressed by Cineworld’s ability to survive against tough odds in recent years. But its debt could yet turn out to be too tough a challenge to solve even for Maverick. So I continue to avoid the shares.
