Leisure and travel businesses have been among the hardest hit by the coronavirus pandemic. The forced closure of cinemas has left the Cineworld Group (LSE: CINE) share price down by more than 70% this year, making it one of the worst performers in the FTSE 250.
However, with lockdown starting to ease in the UK and elsewhere, is it time for contrarian investors to get a head start on the recovery? Today, I’m going to take a fresh look at Cineworld. I’ll also reveal another FTSE 250 share I think could double from current levels.
No movies, no money
Cineworld’s share price collapse is understandable. By April, the group’s entire estate of 787 cinemas in 10 countries was closed. The company’s planned acquisition of Canadian group Cineplex also now looks uncertain.
However, if you believe cinemas can return to something like normal operation within a few months, Cineworld stock could be cheap. At under 60p, the shares are now trading at less than four times 2019 earnings.
Is the Cineworld share price about to rocket?
It’s easy to imagine big profits if Cineworld can get back to normal quickly. But when you’re investing in a troubled situation, I think the most important thing is to consider what else could go wrong.
With Cineworld, I think the big risk to shareholders is debt. At the end of 2019, the group had net bank debt of $3.5bn. That’s roughly 10 times the group’s after-tax profit for 2019. That’s well above my preferred limit of four times net profit.
All of this might not be a problem if the group can quickly return to profitability. But in my view, there’s a good chance this debt mountain will be unmanageable without some kind of refinancing.
If that happens, existing shareholders could be heavily diluted. The Cineworld share price could collapse all over again. Because of this risk, I’m staying away from this cinema chain. Here’s what I’d buy instead.
I think this quality stock could double
Over the last 10 years, WH Smith (LSE: SMWH) has built a reputation for reliable growth and profitability. The growth has come from its travel retail business, while its high street stores have remained more profitable than many investors expected.
Unfortunately, the coronavirus pandemic has brought WH Smith’s business to a halt. Empty airports, railway stations, and high streets mean the majority of stores are closed. Management says sales in April were 85% lower than during the same period last year.
However, this is where the similarities with Cineworld end. Before the crash, WH Smith was highly profitable and only had modest levels of debt. To prevent any risk of financial problems, the company has already raised cash through a £166m share placing and a new £120m lending facility.
As airports and high streets start to reopen, I expect WH Smith to pick up where it left off. Obviously, it’ll take some time for trade to return to previous levels. But the business is starting from a position of strength. I don’t think this is true for Cineworld.
WH Smith shares were trading above 2,600p at the end of 2019. Today, they’re changing hands for less than 1,000p. I don’t see any reason why this stock shouldn’t return to 2,000p over the next few years.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. 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.