Cineworld (LSE:CINE) shares have fallen more than two thirds this past year. As we all know, the fall is largely due to Covid-19. But is this stock now a bargain or a value trap?
Cineworld shares are down
The stock plunge in March was dramatic indeed. Even though the FTSE 100 index didn’t do particularly well at the time, the largest cinema chain badly underperformed the broader index and the stock’s recovery seems to be really slow.
Obviously, the cinema chain, just like airlines, tourist companies, and theatres, has suffered an unprecedented drop in the number of customers. Cinemas are public places and they pose a high infection risk. That’s why the share price is so low.
Recent news
But Cineworld’s recent news was highly positive. The stock even rallied on Tuesday following the announcement of the cinemas’ reopening schedule around the world. The company’s cinemas in the US and the UK will reopen on 10 July. In other countries, the reopenings will happen even earlier than this.
It all looks good for investors. The company also announced that it will take unprecedented measures to maximise its customers’ and employees’ health and safety. These include social distancing rules when queueing for tickets and sanitation procedures. Although this might sound reassuring, many people may still be unwilling to go to a cinema these days because for fear of catching the coronavirus. Not only is it impossible to make cinemas 100% safe, the second wave of coronavirus infections has shown that early reopenings can be dangerous.
Cineworld has acquired many businesses in the past. In the last two decades the company acquired seven smaller competitors, not to mention a merger with Cinema City International. It also planned to buy Cineplex, a Canadian chain of cinemas, before the global coronavirus outbreak. Fortunately, Cineworld announced that it would not go on with this acquisition because of the financial difficulties created by the pandemic. Such deals tend to be painful for the acquiring company’s financials and it’s something Cineworld cannot afford to do now.
Are Cineworld shares a buy right now?
It’s logical to say that the long-term demand for cinema tickets might keep decreasing due to the large number of movie subscription services provided by companies such as Netflix and HBO. However, I still believe that watching films on a large screen and getting the opportunity do so in the company of friends is different from doing the same thing at home. Cineworld is the world’s second largest cinema chain in the world. Due to its market dominance, it is highly likely to survive and flourish after its smaller competitors’ bankruptcies.
But investors should note that Cineworld only has a credit rating of B3 issued by Moody’s. This is far below investment grade. The reason for this is the company’s low level of liquidity and high debt load. Its gross debt/EBITDA ratio is equivalent to 5.5 times, which is already high. But the agency expects it to rise much further. Even though the company’s variable costs are 70% of the total costs and can, therefore, be reduced, the cinema closures are still a problem for its cash flow.
Although the rewards of buying Cineworld’s shares look great, the risks are high too. So, I believe there are many other attractive investment opportunities for investors.
