Can Cineworld shares rise like Skywalker?

It’s hard to find people who are positive about Cineworld. Well, you have found someone. This is the story of why I think there is opportunity in them shares!

Article updated: 18 December 2019 11:00am Author: Michael Baxter

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I watch Netflix on my iPhone. Sometimes, I download content to watch on the train, other times I am watching Netflix on my phone, while my wife sits next to me on the sofa, engaged in Emmerdale or something. But, and lean in carefully, for I shall only whisper, this is a secret between you and me. Sometimes, when she goes to bed, I stay downstairs and select Netflix on the TV.

Those who say Cineworld operates in a dying market because of streaming don’t get the viewing experience. They are looking on with the cold eyes of analysts and not getting consumer psychology. Netflix and the cinema are different; the difference can be defined in inches.

I view Netflix on a screen slightly less than three by five inches. I view a movie at the cinema on a screen that is wider than my house — a lot wider, I should add. When it comes to explaining the difference between streaming and the cinema, size really does matter.

There is, however, another difference. Watching Netflix on my phone is a solitary experience, seeing a film at the cinema is as much a social experience as it is about viewing.

I think that with investing you can boil the buying decision down to two factors: product and timing. If a good product is misunderstood by the markets, this can create a rather strong buying opportunity.

Cineworld has been subject to criticism. Some draw parallels with Thomas Cook back in 2007 when it bought My Travel. It built up massive debts that eventually overcame the company.

Let’s face it, the corporate graveyards are full of tales of excessive leverage to fund takeovers — think RBS and ABN Amro, for another example.

And Cineworld has been busy building up debt. Last year it bought Regal Cinemas for $3.8bn. That was vexing the markets. Debts began to mount. Then a few weeks ago, the company issued a profits warning and it became the most shorted stock on the London Stock Exchange.

With all that negativity, blow me down, the company has only gone along and revealed plans to buy Canadian cinema chain Cineplex. If the deal goes ahead, the number of cinemas in its chain will rise by 165 from the current number of 786.

It is not difficult to find critics. The Telegraph headlined: 'The Nightmare before Christmas for Cineworld shareholders.'

And movie analogies do indeed seem appropriate. The Telegraph likens it to a horror movie; I liken it to the latest Star Wars flick.

It is easy to find reasons not to like — but drill down and you find those reasons are about fears over debt and a belief the cinema is facing an invincible enemy in the shape of subscription TV services, like Netflix.

For me, the former isn’t a problem if you disagree with the latter. I don’t think subscription TV poses any more of a threat to the cinema than it does to theme parks. Instead, the products are complementary.

Subscription TV is posing a threat to TV broadcasters that rely on advertising revenue. It, along with a populist wave prompted by darker forces, who want to see our media dominated by right wing media moguls, may even pose a threat to the BBC. But there is no threat to the cinema.

Mooky Greidinger, chief executive of Cineworld, talks about proving 'the doubters wrong.' It is easy to draw a parallel with Fred Goodwin at RBS who made similar claims about the bank before it crashed.

I don’t think the cinema business is like either the travel business or banking of ten years or so ago.

But there is one worry. Cineworld’s success in any one year is dependent on the lineup of releases. And actually, despite the extraordinary success of the rather brilliant Avengers Endgame — that rare thing, a movie that lived up to its hype — 2019 was not a great year for cinema releases. 2020 may be better — the timing of the release of Avatar 2, may be crucial.

If Cineworld’s profits fell sharply, it may struggle with its debts, but that’s a ‘big if’ that the bears are hanging their argument on. Going against the more consensus view, that I keep reading elsewhere, that Cineworld has got big problems, is not without risk, but then that’s what creates the opportunity.


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.

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