Is the Cineworld share price too cheap?

Cineworld shares have taken a pounding of late. But has the share price fallen too low?

Article updated: 20 April 2018 10:00am Author: Michael Baxter

The inability to grow up is not normally considered an advantage. But when it comes to understanding the cinema business, it can be. At least I consider myself to be pretty knowledgeable about the cinema and movie scene, largely because my taste in movies has never really grown up. I still love the kind of movies I liked when I was a kid. And that can be an advantage because investing in markets you understand can be good advice.

Great things are expected of the latest Disney/Marvel film, Avengers: Infinity War. Analysts reckon it could enjoy the highest ever box office receipts for a premiere. Well, I can say, if it turns out to be a half decent movie, it’s box office takings will be like nothing we have seen before. If this is not the biggest movie ever, I will be very surprised.

That’s good news for Disney, but is it good news for the cinema business? The likes of Cineworld need more than one hit. The odd Disney blockbuster is not enough, as important to how well the biggest films do, is how popular the 20th or 40th biggest hit of the year is.

Consider the results. In 2013, this company made a pre-tax profit of £39.9 million. Since then, every year has been better than the previous year. In 2017, pre-tax profit was £100.6 million.

Yet over that same period, shares have increased by roughly two thirds. In short, growth in profits has significantly outstripped growth in the share price.
This begs the question, why?

The simple answer is that there is more to measuring a company’s performance than looking at P&L. The balance sheet is important too, and recently, Cineworld’s debt increased from around 1.6 times net earnings, a year or so ago, to four times.

It boils down to its now completed purchase of US firm: Regal Entertainment, which has seen Cineworld emerge as the second biggest cinema chain in the world.

So, it has spent heavily: the takeover cost £2.7 billion at a time when the cinema industry is facing challenges on multiple fronts. There’s the likes of Netflix and the imminent rise, of virtual reality.

The launch of Avengers: Infinity War may turn out to be the biggest cinema event ever but could pale into insignificance next to the unveiling of the final season of Game of Thrones next year.

Amazon has revealed plans to create a TV series based on Lord of the Rings with a $1 billion budget. The most expensive movie ever made was the completely rubbish: Pirates of the Caribbean: On Stranger Tides, with around a third of that budget.

So, it’s not just Netflix: Amazon is throwing money around, and now Apple is entering the arena. It is reportedly turning what are surely the greatest ever science fiction books into a TV series: Asimov’s Foundation stories.

And that represents tough competition for the cinema business.

PwC recently projected, for example, that between 2017 and 2021, the UK cinema business will grow by just two per cent to £1.4 billion, against 9.4 per cent growth for video on demand, which is also expected to be worth £1.4 billion that year.

And for all these reasons, the Cineworld share price took a pounding, down by around a third over the last year. Actually, the fall from peak is greater than that, but only after an anomalous surge just before it began to fall.

And senior management were on for a remuneration package which would have handed them several million pounds of shares if they rose by 10 per cent - the cheek! Shareholders rejected the plan.

And yet
But I see a more-rosy outlook. The cinema still represents a great way to go out. Cineworld continues to innovate with its 4DX, complete with smoke, smells and water. It’s about as immersive as you can get. I saw Kingsman the day the 4DX cinema opened in the UK, I can confirm, it was great fun.

Shares are down, but UBS reckons they may have fallen too far. Recently it said: “We have assessed the structural debates in the US market and conclude that whilst there is structural pressure on admissions, we don’t expect to see structural decline in box office revenues.

“In particular; (1) analysis of the weak 2017 US box office suggests that 2017 should be treated as an anomaly, not as evidence of accelerating structural decline trend; (2) Assessing the threat of Netflix using the UBS Evidence Lab Spend Tracker finds no evidence that Netflix usage is correlated with lower or faster-declining cinema attendance; and (3) We believe an opportunity remains to increase ticket prices in the US given lower recent ATP [average ticket price] growth in the US relative to UK.”

I find it hard to disagree.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.