Seen anything good at the movies lately? The answer to that question is “no” for most people in the UK, who haven’t ventured into a cinema since last year or before. While cinemas have now reopened, industry operators such as Cineworld (LSE: CINE) are haunted by investor fears of weakened customer demand. That helps explain why the Cineworld share price has crashed 45% since March.
While Cineworld is still up 73% in the past year, the recent trendline is alarming. Here I consider the pros and cons of adding Cineworld to my portfolio.
Positive drivers for the Cineworld share price
It’s not yet clear how strong demand has been from customers returning to the cinema. Last week, Cineworld had this to say on the subject: “Since cinemas started reopening…trading has continued to improve.” That doesn’t shed much light on the level of demand. In fact I find it alarmingly vague. But what is certain is that at least some film fans are back in cinemas again. Others will likely join them in future.
While the pandemic may have dented confidence, the enduring appeal of the silver screen hasn’t been snuffed out. Indeed, while the focus is often on fewer tickets available due to physical distancing measures, it could be that lockdown has engendered a greater desire than ever for shared experiences in real life.
As a leading cinema operator, Cineworld is likely to benefit from any recovery in demand from patrons. In its comments last week, it noted that it hopes to benefit from “pent-up customer demand”. With a slate of new releases in the current half including the latest James Bond film, the company could sell a lot of cinema tickets.
Hold my popcorn
As an investor, though, I need to ask two questions here.
One is: can cinema operators like Cineworld get enough people through the doors to turn a profit again at some point? I think the answer to that is yes.
But the second question is the trickier one. Would a business recovery translate into a stronger Cineworld share price? The rub here is that in order to bide it over while screens lay dark, Cineworld piled more debt onto its balance sheet.
Cineworld debt pile
It started the year with $8.3bn in net debt. It tapped lenders again in March and yet again in May, suggesting investor confidence in its prospects but also highlighting the precariousness of its financial position. Against a market capitalisation of under a billion pounds, the net debt looks enormous. The risk I see here is that even if the company can become highly profitable in future, it will need to spend a lot of the profits servicing debt. Shareholders may not benefit from renewed profitability for years to come, if at all.
So while there I do see potential upside if cinema lovers swarm back, I think Cineworld stock remains highly speculative. Despite the recent fall in the Cineworld share price, I will not be buying the stock.
