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Why I’m buying this absurdly cheap FTSE 250 stock this month

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Covid-19 has had major impacts on many businesses worldwide, but one of the standout sufferers has been major cinema chain Cineworld (LSE: CINE). Having to temporarily close many of its 767 cinemas, 2020 was a challenge for the company. However, with the share price currently sat at around 91p, here I am going to explain why I am adding this FTSE 250 stock to my portfolio this month.

Light at the end of the tunnel

With Covid-19 cases continuously dropping, it is seeming more likely that the UK is on track for its roadmap out of lockdown. As a result of this, Cineworld doors will be able to reopen in May for the first time since October last year. I expect high demand from eager punters to cause a surge in business after being deprived of big-screen action for some time, and as such I anticipate a rise in the price of this FTSE 250 stock.

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To add to this, its operations in the US – which accounts for near 75% of total revenues – have started to pick up after the country’s vaccine rollout. Warner Bros’ Godzilla Vs Kong was released in the US in March and since has seen large crowds’ turnout to watch. There are also films in the pipeline after initial postponement, most noticeably the latest James Bond film No Time to Die.

Cineworld also recently agreed on a deal with Warner Bros beginning in 2022, which gives Cineworld exclusive rights to a 45-day window to show films before they are streamed – a positive sign for the FTSE 250 stock’s future performance.

Share price risks

Firstly, although we are nearing the end of the pandemic, I must not forget the vast impact this has had on business operations for Cineworld. As my fellow Fool Zaven Boyrazian wrote on, its net debt at the end of 2020 was around $8bn with the company recording a record $3bn pre-tax loss for the year. For comparison, the year before it recorded a $212m profit. Revenues in 2020 also plummeted by over 80%. Coming back from this will pose a serious challenge for the FTSE 250 stock.

On top of this, although the reopening in the UK next week will no doubt boost Cineworld income, this will be on a reduced capacity – and therefore footfall will be nowhere near pre-Covid levels. This will affect levels of income and hence the price of the FTSE 250 stock.

I must also not ignore the streaming industry and the rise it has had during the past 12 months. This could also have a damning effect on footfall for cinemas, as people can now gain that cinematic experience from the comfort of their own home (something I am sure they have got used to throughout the course of the last year).

Long-term returns

Although Cineworld has faced a tough time, the future does look bright. It would be naïve of me to disregard the rise of streaming services like Netflix and Disney+, but I am confident that a build-up of keen cinema fans ready to return to the big screens will bode a positive future for Cineworld. This may not be visible in the short term, but from a long-term perspective I see this FTSE 250 stock as a must-have for my portfolio.

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Charlie Keough 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.

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