Cineworld Group (LSE: CINE) is a cheap share that’s surged in recent weeks. A 21% price increase so far on Tuesday now takes it to above 70p, its most expensive in eight weeks. Yet it still provides exceptional value on paper following the recent stock market crash. Right now, it trades on a forward P/E ratio of just 8 times.
The world’s second-biggest cinema chain slumped to 10-year troughs during the recent crash. It fell as investors fretted over how it would be able to service its colossal debt mountain as its theatres were shuttered. It stands to reason, then, that news emerging last night that the UK government is planning to step up quarantine easing boosted investor appetite for Cineworld stock today.
This isn’t the only news hopeful share pickers have latched onto recently. Cinemas have already begun opening again in the US, a territory that generates the lion’s share of Cineworld’s profits (73% to be exact). Theatres have begun flinging open their doors in Georgia and Texas again. Falling infection rates on a nationwide basis are raising hopes more reopenings can be expected before long.
One of the big stories of the pandemic has been how streaming services revenues have exploded. It’s no surprise, as banged-up citizens have sought distractions and entertainment wherever they can.
It’s also led to many predicting that rising demand for Netflix and the like has put another nail in the coffin of the cinema sector. That theme gained traction after Universal successfully launched Trolls World Tour through video-on-demand in April. It’s racked up more than $100m in sales so far and led to an almighty row with theatre chains, including Cineworld. Not a shock, of course, as the sector fears studios will begin to bypass cinemas altogether.
Back from the crash
These are fears I consider to be quite overblown. Streaming services have been around for years and yet box office takings remain strong. In fact, ComScore data shows the global box office enjoyed record takings of $42.5bn in 2019. Don’t underestimate the staying power of the cinema and film studios’ desire to piggyback it.
A recent poll by Atom Tickets reveals how Americans are eager to get back into the cinema. When asked how soon they’ll attend when a film they want to watch is released, six out of 10 respondents said they would return within a month. A quarter of those questioned said they’d buy a ticket immediately too.
Of course, there remains great uncertainty over cinema openings as the Covid-19 crisis rolls on. And so the revenues picture for Cineworld — and again its ability to ease the pressure on its balance sheet — remains quite cloudy. But I reckon these fears are baked into the share price.
I think the chain is still an exciting share to buy today, thanks to its recent invasion of North America. That’s why I first bought the company for my own stocks portfolio a couple of years ago.
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Royston Wild owns shares of Cineworld Group. 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.