So you’re in Cineworld (LSE:CINE) stock and wondering whether the recent decision by tycoon Liu Zaiwang to acquire over 5% in the company is going to make a big difference.
Cineworld shares have not looked good since the pandemic struck. Cinemas were always going to take COVID on the chin, and Cineworld stock has tanked in a big way, but is there light at the end of the tunnel?
We don’t think cinema is high on the government’s list of priorities right now, and we don’t anticipate that even if they did open, there is going to be a rush by the public back into cinemas anytime soon. Cineworld stock had, however, been starting to pick up speed into early June when it hit 99p, but since then has languished.
Some investors are now wondering whether Liu, via his Jangho Group, is planning to take Cineworld private.
Film studios hesitant about new releases
Part of Cineworld’s problem is that film studios have not been keen to release any big blockbusters into the market this summer, for obvious reasons. Plus the public feel a lot safer staying at home in front of Netflix and Amazon Prime.
Much of the investor excitement recently has revolved around possible takeover bids for all or part of the group. Cineworld does look cheap, and we can see how anyone who is thinking long term – e.g. private equity money – could see this as a chance to take the group private. There has been speculation, for example, that a big Hollywood studio might decide to pick up Regal, Cineworld’s US business.
Morgan Stanley is very bearish on the future of the cinema as a source of public entertainment. Like the video store before it, Morgan Stanley reckons the cinema is in the process of dying a death and that on-demand video will be its natural successor. COVID is just hastening cinema towards its grave.
Is Cineworld in the same boat as cruise lines?
Cineworld is in a similar situation to the cruising industry. It was directly in the path of the COVID hurricane. It is slowly coming back to life, with the gradual reopening of its cinemas, but as we are seeing with commuters in the UK this week, this does not mean people will come rushing in to see movies. Revenues will remain severely depressed over the winter. With plays like this, it is important to evaluate Cineworld’s ability to endure the lean months – can it endure for long enough to benefit from an eventual return to normality?
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Cineworld secured $250 million in debt from private investors in June, and abandoned its bid to acquire Cineplex in Canada, which was sensible in the circumstances. Cineworld also increased its revolving credit facility by $110 million. Cineworld said back in March that there was a risk of breaching debt covenants if cinemas stayed closed for three months. But hey, it looks like Cineworld has come through the worst and is still with us.
Investors really look like they have two options here: buy for the short term in anticipation that there is going to be a serious bid for Cineworld, and this certainly does not look beyond the boundaries of possibility. Alternatively, view it as a longer term value play and ride the stock up once cinemas fully reopen, but be prepared for some short term dips.
Caveat emptor: we agree with Morgan Stanley that the cinema is an outdated model and does not represent an enormous growth market for investors. Cinemas will survive the pandemic, and they will survive the challenge from streaming services, but in a much reduced format. This does not look like a long term growth sector to us.