I last wrote a full-length article on Cineworld (LSE: CINE) a little over a couple of months ago. The impetus for it was the Cineworld share price increasing by 40% in a month. Cut to now and the stock has fallen back to its pre-January levels. Moreover, in the past year, its share price has dropped by over 65%. So why am I bullish on it now?
The Cineworld share price could lose its penny stock status
One reason is the improved outlook for the Cineworld share price, despite its fall. This only backs my own bullishness. Consider this. Analysts expect a 24% increase in its share price in the next 12 months, as per Financial Times data. Note that this is just the average number.
Really positive analysts expect it to rise above its current penny stock levels to around 116p in a year. This is a huge jump of 255% from now! Interestingly, even the less upbeat ones expect a relatively small decline of 6.6% only. In sum, the Cineworld share price could make huge potential gains for investors. And even the losses, if any, are likely to be muted.
Attractive market valuations
While I do not know the underlying reasons for these forecasts, my own analysis reinforces them. First, consider the company’s market valuations. It is still loss-making, so my go-to measure, which is the price-to-earnings (P/E) ratio, does not apply here. Instead I looked at the company’s price-to-sales (P/S), which is at around 0.3 times right now. By comparison, AMC Entertainment, the big cinema chain that was a darling of the Reddit investors for a while, is at 5.2 times. This makes Cineworld more attractive by comparison.
What about its huge debt?
It can of course be argued that market valuations do not adequately reflect Cineworld’s situation. For instance, its big debt does not get captured with these measures, even though it might be a turn-off for investors. To address this, I considered its enterprise value (EV) instead, which considers debt. Ideally I would consider the EV/EBITDA ratio, where EBITDA is just the earnings before interest, taxes, depreciation, and amortisation.
But AMC is still running-up EBITDA losses, which disallows comparison, so I considered EV/revenue instead. In this case, Cineworld has a ratio of around four times compared to AMC’s at almost 10 times. In other words, no matter how I look at it, the stock appears to be competitively priced.
Moreover, even if I compare Cineworld’s EV/EBITDA to other indebted companies like Rolls-Royce, which has a ratio of 14.3 times, it still looks better at 12 times. An improvement in its recent financial numbers and a generally positive outlook make it even more appealing.
What could go wrong
That said, there could be bumps along the road as well. Another wave of coronavirus cannot be ruled out, which could be a setback for the stock. And rising inflation is eating into consumers’ budget anyway, which could impact their spending on entertainment. But the list of risks is, as always, endless. And if as an investor I continually focus more on the risks than the rewards, I will be waiting a long time before investing! I would buy more of it now.