Cineworld (LSE: CINE) shares are up about 80% in the past year. The company’s shares took a dive last year as most of its theatres were closed due to the Covid-19 pandemic. However, the shares are now recovering, due to optimism over the reopening of theatres.
I would like to understand the various pros and cons of investing in this company.
The bull case for Cineworld’s shares
The company’s theatres have started to open. Screens in the US began to open in April with restrictions in different places. Similarly, in the UK it will open next month. According to the research conducted by Metrixlab, 59% of respondents cited the cinema as the most missed out-of-home entertainment in the UK. This is positive news for the industry and much needed for Cineworld.
Warner Bros’ Godzilla vs Kong movie made a strong debut in the US earlier this month. This bodes well for Cineworld as it derives around 73% of its revenue from US operations. The company has also struck a deal with Warner Bros to secure a 45-day window for films to be shown in theatres before they are released on streaming services. The deal will be effective from 2022 and beyond in the US. In the UK it is 31 days, rising to 45 days based on reaching certain milestones. This will reduce the competition from streaming services and video on demand. The company is popular in the US with the name Regal Cinemas. It bought Regal in 2017.
The company has managed to handle the Covid-19 situation very well. The group’s chief executive officer is confident to be back in normal business by the end of this year. However, actual performance might differ. It was able to negotiate and reduce its monthly cash burn to $60m during the closure of its theatres.
Reasons to avoid Cineworld’s shares
The company will face competition from streaming services like Netflix, Amazon Prime, HBO Max, and Disney Plus. People can watch movies from the comfort of theirs homes at a low cost compared to what they spend in theatres. Another reason why people might skip movie theatres in the current situation is the fear of the spread of Covid-19.
Even though movie theatres are beginning to open in certain parts of the globe, it could take another couple of years for the business to reach the pre-Covid-19 levels. This will be a challenging task for the companies in this sector to survive with rising costs and other fixed expenses.
The company’s debt levels are rising. If there is a further delay in the reopening of theatres due to the increase of Covid-19, the company’s shares might hit the floor once again.
Final view
I think the company’s revenues will start to improve very soon. Its deal with Warner Bros is a positive one. However, I am not a buyer of the stock today. I will wait to get more visibility of its earnings potential. The high debt is also a concern. For now, I am happy with another value stock that I have reviewed recently.
