The Motley Fool

Cineworld shares dip on reopening news: what I’d do now

Image source: DCM

The Cineworld Group (LSE: CINE) share price fell when markets opened on Tuesday morning, despite the company revealing plans to reopen US cinemas in April. UK cinemas are set to follow in May.

Cineworld also revealed the outline of a new exclusivity deal with Warner Brothers studios. Starting in 2022, the cinema chain will be able to show films in US and UK theatres for a guaranteed period before they’re available through video-on-demand services.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Today’s news seems positive to me. But Cineworld’s share price has already risen by 75% this year and by 165% over the last 12 months. Is it too late for me to buy this reopening stock — or is there more good news to come?

What I like

Let’s start with the positive news from today’s announcement. Cineworld’s Regal business in the US generates 75% of the group’s revenue but has been closed since October. Selected theatres will now reopen with Godzilla vs Kong on 2 April, followed by a wider opening for Mortal Kombat on 16 April.

According to the company, capacity restrictions will allow occupancy of 50% or more in most US states. CEO Mooky Greidinger says that this means “we will be able to operate profitably in our biggest markets.” 

I reckon that could be positive for Cineworld shares.

Warner Brothers backs cinemas

The new deal with Warner Brothers also looks good to me. Starting in 2022, Cineworld will get a 45-day exclusive period to show new films in US cinemas before they’re released to Warner Brothers’ premium video-on-demand service. In the UK, Cineworld will get a 31-day exclusivity period.

This deal is particularly significant, in my view, because it reverses Warner Brothers’ decision to release its new films directly to premium video-on-demand in 2021. If the Hollywood giant had chosen to continue this policy into 2022, I reckon it could have made life tough for cinema chains.

Are Cineworld shares still cheap?

Cineworld has a good story. The Greidinger brothers who run the business are said to be cinema fanatics. They’ve built the group into the world’s second-largest cinema chain.

I like a good story as much as anyone. But I don’t invest my hard-earned cash into stories unless I’m happy that the numbers stack up nicely too.

Cineworld shares were probably cheap at 40p a year ago. But at 110p today? I’m not so sure. This share price values the stock at 14 times 2022 forecast earnings, despite the group’s $8bn net debt.

That seems high enough to me. I’m also aware that today’s press release didn’t include any details of the financial deal Cineworld has struck with Warner Brothers. From what I can see, the movie studio had a stronger negotiating position than the cinema chain.

Cineworld raised $750m of extra funding in November so I don’t expect the company to run out of money. But I’m uncomfortable with the group’s high debt levels. When business returns to normal, I think there’s a risk that shareholders could be asked for extra cash to help cut debt.

I reckon this reopening stock is already trading at fair price. I won’t be buying Cineworld shares for my portfolio at this time.

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

Roland Head 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.