Prime Minister Boris Johnson has promised us an “incomparably better” summer than 2020. Even nightclubs might be able to reopen by July. So, I’m not surprised to see the Cineworld (LSE: CINE) and easyJet (LSE: EZJ) share prices up by as much as 10% this morning.
Airlines and cinemas are among those that have been hardest hit by coronavirus. I’ve been wondering whether it’s the right time to buy into these stocks, as a trade on reopening the economy.
easyJet shares: well supported
During the final three months of 2020, easyJet flew 23,428 flights, compared to around 130,000 during the same period in 2019. I suspect traffic has fallen since December, although the airline hasn’t yet provided any update on this.
However, easyJet’s financial position actually looks fairly safe to me. The airline has raised £4.5bn since the start of the pandemic, through a mix of loans, aircraft sales and by selling new shares. As of 25 January, the company still had access to £2.5bn of unused funding.
Management says that cash costs have been reduced to £40m per week with all aircraft grounded. That suggests the airline could stay afloat for at least a year without needing to raise additional funds.
Fortunately, I don’t think that’ll be necessary. Assuming a gradual return to normal flying this summer, I don’t expect easyJet to need any further funding.
What would I pay?
easyJet’s share price has been fairly volatile over the last year. The stock’s 52-week low of 410p is 70% below its 52-week high of 1,377p. The price, as I write, is 937p — roughly in the middle of this range.
However, easyJet issued new shares in June, increasing its share count by 15%. That means a share price of 940p today is equivalent to around 1,100p before the fundraising. In addition to this, easyJet has more debt than it did a year ago — debt that will need servicing or repaying at some point.
Consensus forecasts suggest the stock is trading on around 15 times 2022 earnings and about nine times 2023 earnings. For me, that’s high enough for an airline stock at this time. I don’t think easyJet shares look especially cheap and won’t be buying at current levels.
What about Cineworld shares?
I’ve written about Cineworld (LSE: CINE) in these pages a few times before. The founding Greidinger brothers have built the world’s second-largest cinema chain, with 787 cinemas and 9,500 screens.
I admire Cineworld’s scale and success. But I think that the group’s $8bn net debt is probably unsustainable. I expect the company will need an equity refinancing at some point, which could cause heavy dilution for existing shareholders.
The Greidingers control around 20% of Cineworld’s stock, so they have an interest in refinancing the business without wiping out shareholders. My guess is they plan to delay a full refinancing until cinemas are open again. This would probably justify a higher share price, reducing any dilution.
Cineworld shares currently trade on around 10 times 2022 forecast earnings. That’s a lower multiple than for easyJet shares, but I think the situation is quite different.
Whereas easyJet’s borrowings look manageable to me, I think Cineworld’s debt looks problematic. For that reason, I’ve ruled out Cineworld as a potential buy.
