As recently as the end of September, Cineworld shares had bounced back to 82p. Back below 70p at the time of writing, does the recent tumble mean shares in the cinema group are a buy for me?
Reasons to buy Cineworld shares
One of the reasons Cineworld shares could be a buy is that the James Bond film, No Time to Die, has dramatically boosted cinema attendance. Rival Odeon said it had sold a staggering 1m tickets in Britain and Ireland alone. The movie took a mighty $121m at the international box office over its opening weekend, according to Universal Pictures last week. It’s been a great success and one much needed by cinema chains.
For consumers who’ve not done much in the last 18 months and saved money during lockdown, it’s a welcome distraction. Cinema is a relatively cheap indoor activity and with winter coming, a run of good films could really help the cinema operators.
Other studios will see the success of No Time to Die and still want to use cinema as their primary release channel, rather than streaming at launch. That may help mute the effects of some of the changes that were happening in the industry (and that worried many investors) before anyone had even heard of Covid-19.
Changing dynamics of the industry
Longer term though, does investing in Cineworld shares make sense for me? I don’t think so. Film studios are increasingly putting films that have been very recently released in cinemas online. That reduces the urgency of a trip to the cinema.
The continued growth of streaming services continues to cut away at the appeal of cinemas that haven’t done enough to respond to the challenge.
When it comes to Cineworld shares there are the fundamentals to consider. Even if Cineworld makes it through the next few years, will it ever be as a strong a business as it was and will its share price ever attract enough buyers to push up the price? I’m not sure. Due to massive acquisitions and the pandemic, net debt has gone from £361m to £8.4bn. The company’s market cap is less than £1bn remember.
Shareholders have also been massively diluted as the company has fought to survive. The share count more than doubled from 2015 to 2020. Now all earnings are distributed between more investors, meaning the earnings are worth less per share. Unless the company buys back shares, then it can’t grow its earnings per share.
There will be more film releases in 2021, of course, and 13 of these will be shown in Cineworld cinemas this year, including West Side Story and The Matrix Resurrections. These won’t be as big as Bond and time will tell if they’ll really pull in the punters and enough money to allow Cineworld to recover from the trauma of the last 18 months.
More shares, more debt, and an industry in decline all combine to make me very wary of investing any of my hard-earned cash in Cineworld shares. I’d much rather invest in great UK growth shares with long-term potential.
Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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