As the war for digital content and digital streaming subscribers heats up, it’s easy to forget that the vast majority of mainstream movies still open on the silver screen before going digital. The social elements of watching a movie on a big screen surrounded by friends is difficult to replicate through streaming platforms.
Although cinema attendance has been steadily declining in the US and has somewhat plateaued in Europe over the past decade, the volume of tickets sold could explode with upcoming movie releases.
A slew of upcoming blockbusters like Joker, Frozen 2 and, of course, Star Wars: The Rise of Skywalker should be great news for theatre owners like Cineworld Group (LSE: CINE). In fact, the company mentions these “highly anticipated” releases as a catalyst for near-term growth in its recent quarterly report.
Why, then, is the stock down 12.6% since the start of the year? Here’s a closer look at why Cineworld’s stock has been punished this year and why I’m still bullish.
As I mentioned above, moviegoers in the US have been cutting back for the past few years. Movie attendance hit a 24-year low in 2017 and has barely crept up since, according to data published by the The National Association of Theatre Owners (NATO).
Which is why Cineworld’s decision to spend $3.6bn to acquire Regal Entertainment and enter the American market doesn’t make sense to me. Now, the US accounts for 75% of the group’s sales. Sales in the region declined last year. Box office and admissions were down roughly 18% each.
Although the group has also recently entered growing markets in Eastern and Central Europe, like Poland, this won’t be enough to offset a steady decline in the world’s largest movie market. Instead, Cineworld should have entered China or India, in my opinion. Movie ticket sales hit 499m in mainland China this year, with Indian consumers collectively spending an estimated $11bn. That’s where the growth is.
Too much debt
That $3.6bn acquisition of Regal also added to the company’s immense debt burden. The firm is saddled with £2.20 in debt for every quid in equity on its book. According to its latest report, it would take a little more than three years’ worth of earnings before interest, taxes, depreciation and amortisation to cover the debt pile.
But all these factors seem to have been priced in by the market already. The recent plunge in the company’s stock price has pushed the dividend yield up to 7.7%. Meanwhile, the stock trades at a mere 10% premium to book value per share.
If highly-anticipated upcoming movies like Joker can get more English-speaking audiences to visit cinemas across Europe and America this year, I believe the market could be compelled to re-rate the stock.
But while Cineworld Group certainly offers excellent value and a hefty dividend at the moment, I’d rather wait and see how the upcoming movie releases impact the company’s bottom line and debt burden before jumping in.
VisheshR 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.