It’s been a tough year for various sectors hit by the pandemic. One of the hardest hit firms has been Cineworld (LSE:CINE). The world’s second largest cinema chain has been forced to shut due to social distancing requirements along with mandatory lockdowns. Compounding this problem has been the large film studios postponing the release of high budget blockbusters. As a result, Cineworld shares fell at one point to a low of just 15.64p! This is a far cry from January this year, when the share price was above 200p.
Is Cineworld stock fundamentally cheap?
At the current share price around 60p, Cineworld (which reports in dollars) has a market capitalisation of $1,098m. In theory, if you had $1,098m, you could buy the business. Compare this to the net asset value of the business as of 31 December 2019. The figure was $3,247m. There’s a huge gulf between those two numbers. Cinemas aren’t as valuable as they once were, along with a decrease in inventory and trade receivables.
At the time of the half-year results for 2020, net assets still stood at $1,254m. So the Cineworld share price is still a fair way off reflecting the actual fair value of the company. In my eyes, this makes the stock a buy, with it being fundamentally cheap.
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The second reason I think the Cineworld share price is cheap is due to the low expectations for 2021. The half-year report showed admissions were down 65% on the same period last year. But this could change soon. Yesterday we saw the first vaccine administered here in the UK. The US is also shortly expecting to distribute a vaccine. If the rollout is successful over the next six months, then I’d certainly expect the rolling six-month cinema admission figure to improve.
If admissions even claw back a percentage of the levels seen in 2019, this immediately filters revenue into the business. Cineworld is a simple business in its operations, so this cinema admission revenue should directly help the Cineworld share price move higher.
Contrarian investing
The recent news of Warner Bros looking to stream upcoming movies is undoubtedly a blow for Cineworld. But consider other studios that have large films waiting to go on the big screen first. No Time To Die, Black Widow and Dune are just three examples of films that are expected to gross huge figures in 2021. Cineworld has a bank of big movies to call on that should kick-start business again for it.
It does need to survive in the interim, and a successful funding of $750m only two weeks ago should go a long way towards this.
Investing in Cineworld right now would be contrarian investing. I get that. Yet some of my most profitable investments have been from stocks that were undervalued and no one wanted to buy! As long as you’re comfortable with the risk you’re taking on, Cineworld shares could be top performers next year.
It could take a while, but from 60p, a return to levels seen in 2019 around 240p would give a 300% return. When I look at the risk and reward potential, even a modest investment would have the ability to make me rich using those numbers.
