The Cineworld Group (LSE: CINE) share price is down by 25% from its March highs, but this recovery play is still up by more than 200% from last year’s lows.
With most of the company’s UK and US cinemas now open, I reckon it could be a good time to take a fresh look at this business. If Cineworld shares look cheap based on how I think the company should trade, then I might consider buying.
Party like it’s 2019?
Cinemas have had it tough over the last year. They’ve been closed, while the popularity of streaming services has boomed. More films are being released on demand, and more big-name actors are working directly for streaming platforms.
Personally, I think people will go back to the movies. I’m basing my analysis on the view that cinemas will (mostly) get back to normal. As Cineworld is the world’s second-largest cinema chain, I think this company should keep hold of its big share of the market.
To keep things simple today, I’m going to assume that Cineworld’s profits will return to 2019 levels over the next two years.
Cineworld share price: cheap as chips?
Cineworld generated a pre-tax profit of $212m in 2019. That translated into earnings per share of $0.13. At today’s exchange rate, that’s equivalent to 9.3p per share.
As I write, Cineworld’s share price sits at 91p, so the shares are valued at just under 10 times 2019 earnings. That seems reasonable to me.
However, the latest broker forecasts I’ve seen suggest that Cineworld’s earnings won’t get back to 2019 levels until 2023. It’s too soon to say, but personally I think the recovery could be quicker than this. Going to the cinema is an affordable treat that gets us out of the house. If people feel safe, I think they’ll want to go.
What could go wrong?
Cineworld’s share price is still down by 50% from its pre-pandemic levels. Unfortunately, while the stock has been falling, debt levels have been rising. The group’s net debt has risen by $1.2bn to $8.3bn since the start of 2019.
As an equity investor, I can’t ignore this. These extra borrowings mean that future interest costs and repayments are likely to be higher than in the past, leaving less spare cash for shareholders.
A second headache is that the company needs to fund a $255m legal payout to shareholders of Regal Cinemas, which Cineworld acquired in 2018. This payout could cancel out the benefit of the $203m US tax refund the Cineworld received recently.
Cineworld shares: the big picture
I think that Cineworld’s business will recover. I’m starting to think that the company may also avoid having to raise funds by issuing new shares, something I previously expected.
However, the cinema industry was already struggling with slowing growth before the pandemic. Cineworld’s revenue fell by 6.2% in 2019. I don’t expect this business to deliver the kind of market-beating growth it did in past years.
Indeed, it’s possible that I’m wrong and that the cinema market has changed forever. In that scenario, Cineworld could struggle to return to historic levels of profitability.
Overall, I think Cineworld shares are already fairly priced for a return to normal trading. I don’t see too much upside from the current share price, but I can see plenty of risks. I won’t be buying.
