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Have £3k to spend? I think this cheap FTSE 250 growth stock could be worth the risk

A record number of people visited the cinema in the UK over 2018. Unfortunately, this is still to be reflected in the price of FTSE 250 operator Cineworld (LSE: CINE).

True, the stock performed well for the majority of last year, rising almost 50% from late January to early October. The last few months of 2018 were distinctly less kind, however, with the £3.8bn cap giving up a not-insignificant proportion of these gains. 

The stock is falling again today, despite the company reporting decent trading over the last financial year. 

Does an already-cheap looking valuation make this a golden opportunity for investors to buy a slice of a business in a seemingly resilient industry?

“On track”

With 308m cinema-goers passing through its doors in 2018 (a rise of 2.6%), Cineworld grew revenue by 7.2%. 

According to the company, this performance was due to a combination of strong film releases, the ongoing refurbishment of its sites and the rollout of its premium formats. 

Performance in the US was particularly strong where films such as Black Panther and Incredibles 2 succeeded in drawing families away (at least temporarily) from streaming services such as Netflix.

Growth in the UK and Ireland was less impressive (3%) with the company facing tough comparisons from the previous year — a performance matched at Cineworld’s operations in Eastern Europe and Israel (+3.1%). 

Some 13 new sites were added over 2018, bringing its total estate to 790 cinemas by the end of the year. It also invested in technology such as IMAX Laser projectors and 4DX screens. 

According to management, the company remains “on track” to meet expectations for the current year and the integration of Regal is “progressing well“.

These days you can pick up a slice of Cineworld for 11x forecast earnings for the new financial year. That seems cheap considering the film slate for 2019 includes likely blockbusters such as Toy Story 4 and Star Wars: Episode IX. Based on an estimated dividend per share of 13.4p, the stock will also yield an attractive 5.1% at today’s price.

That said, I think the investment case hinges on how quickly it is able to pay down the debt resulting from the takeover of Regal last March. With further hikes to US interest rates still possible, this is something that at least warrants consideration from prospective owners before reaching for the ‘buy’ button.   

Riskier alternative?

If you’re put off by the amount of debt carried by Cineworld, small-cap growth play Everyman Media (LSE: EMAN) could be a suitable alternative. It reported a net cash position of £2.13m back in September.

The company, which operates 26 sites across the country, is attempting to redefine the cinema experience by offering customers plush sofas rather than standard seats and enhanced customer service (albeit reflected in the price of tickets).

However, there are reasons to be wary. Everyman’s stock is vastly more expensive. Based on an expected 31% growth in earnings per share, shares trade on a forward P/E of 55.  That’s frothy at the best of times, but even more so at a time when consumers are tightening the purse strings as a result of Brexit-related economic uncertainty.

It’s also worth mentioning that Everyman’s operating margins are considerably lower than those of Cineworld and the former returns nothing in the way of cash to shareholders. 

As such, I’d probably back the FTSE 250 stock as a safer bet right now. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.