Shares in cinema operator Cineworld Group (LSE: CINE) fell by 20% in November, even as moviegoers flocked to see the latest James Bond film. With more potential blockbusters scheduled for release later this year, I reckon Cineworld could be on track to deliver a strong recovery over the coming months.
In this article I want to explain what I think happened in November — and whether I’d buy Cineworld stock for my portfolio.
007 boosts revenue
Us Brits love a good Bond film. Cineworld’s UK revenue in October was 27% above 2019 levels, as moviegoers rushed to see Daniel Craig’s final outing as 007.
The group’s cinemas in the US and elsewhere also delivered an improved performance. Cineworld’s total revenue in October reached 90% of 2019 levels. As a result, the business generated positive cash flow in October, for the first time since before the pandemic.
Takings were boosted by punters tucking into high margin treats, such as soft drinks and popcorn. We don’t know if visitor numbers have matched 2019 levels — Cineworld didn’t release this information. Even so, I reckon October’s result is a big milestone on the road to recovery.
Watch out for the evil villain
Blockbuster movies like No Time to Die are the heroes in this story, driving movie fans back to the cinema. But I reckon there’s a villain in the piece, too — debt.
Cineworld’s net debt was a massive $8.4bn at the end of June. Even if we exclude lease liabilities on the group’s cinemas, net debt was still $4.8bn. That’s equivalent to 3.6 times 2022 forecast EBITDA, or underlying cash profits.
This level of leverage is well above my preferred limit of 2-2.5 times EBITDA. I think there’s still a risk that Cineworld will struggle to repay this debt without some kind of restructuring. This could include raising new cash from shareholders.
Even if Cineworld manages to dodge this bullet, there’s another potential baddie lurking in the shadows. Canadian cinema chain Cineplex is currently seeking $1.1bn in damages from Cineworld for cancelling an acquisition deal agreed just before the pandemic.
I have no idea who will win this legal battle. But I think that uncertainty around the group’s debt levels and legal problems are two of the main reasons why the shares fell in November.
Cineworld shares: would I buy?
I don’t want to be too downbeat here. Cineworld is the world’s second-largest cinema business. It has good economies of scale and a strong portfolio of sites in the UK and US. I think the company is a good operator, too. CEO Mookie Greidinger is a sector specialist who is known to be fanatical about the cinema experience.
Broker forecasts suggest Cineworld revenues will rise to 90% of 2019 levels next year, allowing the group to start repaying some of its debt. Earnings are expected to return to 2019 levels in 2023. If this happens, then the I think the shares could be cheap at current levels.
However, 2023 is still a long way away. In the current environment, I’m not comfortable investing in a consumer business with such high levels of debt. For me, the risks are too high.
I may return to the cinema, but I won’t be buying Cineworld shares for the foreseeable future.