There are two ways of looking at Cineworld (LSE:CINE). Either it’s a classic example of an indebted company with a product that is going out of fashion, that cannot possibly survive a crisis such as the coronavirus. Or it’s a bargain.
Cineworld boss Mooky Greidinger has skin in the game. The Greidinger family owns 28% of Cineworld. His family’s fortune is closed linked to the performance of the company he leads. That’s a good start.
Then there’s product. I simply don’t think critics of the cinema business model understand how disruption works. Cinema is not like shopping, it’s a social pursuit. For some, it’s an important part of the dating ritual. For others, it’s a chance to do something with friends. Netflix does not compete with cinema, as Cineworld critics say; it complements it.
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Cineworld’s debts
Before the coronavirus pandemic, there were fears about Cineworld’s debts. I believe that underpinning those fears was a mistaken view about the future of the cinema.
Coronavirus is clearly having a massively negative affect on cinema. This will probably get worse. The obvious argument suggests that indebted Cineworld can not survive such a crisis.
The auditors said words to that effect as part of Cineworld’s annual results, announced on 12 March. Unsurprisingly, media headlines related to Cineworld were full of woe. Also unsurprisingly, Cineworld shares have taken a hit. Over the last month, Cineworld shares have lost two-thirds of their value, and almost three-quarters of their value this year.
Are shares cheap?
The market valuation of Cineworld is now £776m. In the financial year ending 31 December 2019, operating profit was £724m, just £50m less than market cap. Net profit after tax was £180m, around a quarter of market valuation. That is one extremely low price-to-earnings (P/E) ratio.
If Cineworld goes bust, then any P/E ratio is too high.
On the other hand, if words spoken by Greidinger are right, then shares are at a bargain basement price.
Greidinger was quick to admit he didn’t know how the coronavirus will pan out — let’s face it, none of us do. But he also pointed out that a big proportion of Cineworld’s costs are variable. It doesn’t pay for films until they are shown, for example.
Rent is a problem, as are rates — if business rates and rent carries on being paid as normal, then Cineworld would have challenges. But why would local government or landlords force Cineworld, a vital contributor to their income, into bankruptcy?
Greidinger made a powerful case for suggesting that the company can hold on during an extended period of cinemas being closed.
He also suggested that when the virus finally recedes, we will see a rush of big movie releases as films, initially planned for the spring, finally hit the big screen. The latest Bond film is an example of this.
Greidinger speculated that the six months following the coronavirus could see the most active period in cinema history.
Cineworld shares are not for cautious investors. The company may fail to hold on. Whatever you do, don’t invest all your money into this company. But for a risky punt that could pay off handsomely, Cineworld shares seem enticing.
