What keeps Cinemark Holdings stock below pre-Covid levels?
Cinemark Holdings shares (NYSE: CNK) is currently trading at $ 23 per share and is still 32% below its early 2020 level. Cinemark Holdings, which is an American movie chain, saw its shares trade above $ 32 in February 2020 just before the outbreak of the pandemic and is still almost 29% below that level as well. The stock has gained 86% from its March 2020 lows against the S&P 500 which has been up 90% during that time. The rally in action in recent months has been driven by the gradual lifting of the lockdown and the successful rollout of vaccines, which has led to an expectation of an increase in the number of functional theaters. In addition, the stimulus measures are expected to increase the purchasing power of consumers, reflected by higher demand, which the company can benefit from, as its capacity also gradually increases over the next few quarters. Returning to the pre-Covid level means CNK will have to record an increase of over 40% from here. However, we don’t think this will happen any time soon. The reason is that although almost all Cinemark theaters in the United States are operating at 50% or more of capacity, in other major international markets only about 50% of Cinemark theaters are operating due to recent spikes in positive cases. for Covid. We believe that a strong performance in the US market will cause the share to rise further by 10% in the short term, making it a decent investment opportunity, but pre-Covid levels can only be achieved. once the company begins to operate at almost full capacity in the international markets also. Our conclusion is based on the detailed comparison of Stock market performance of Cinemark Holdings during the current crisis with that of the 2008 recession in our dashboard analysis.
Coronavirus crisis 2020
Timeline of the 2020 crisis so far:
- 12/12/2019: Coronavirus cases first reported in China
- 01/31/2020: WHO declares a global health emergency.
- 02/19/2020: Signs of effective containment in China and big central banks’ hopes of monetary easing help S&P 500 reach record high
- 03/23/2020: S&P 500 34% drop from the peak level seen on February 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices collapse in mid-March amid Saudi-led price war
- Since 03/24/2020: S&P 500 recovers 90% from lows seen on March 23, 2020, as the Fed’s multibillion-dollar stimulus package removes short-term survival anxiety and injects liquidity into the system.
On the other hand, here is how the CNK share and the market at large behaved during the crisis of 2007/2008.
Timeline of the 2007-08 crisis
- 01/10/2007: Approximate pre-crisis peak of the S&P 500 index
- 09/01/2008 – 10/01/2008: Accelerated decline in the market corresponding to Lehman’s bankruptcy filing (09/15/08)
- 03/01/2009: Approximate low point of the S&P 500 index
- 12/31/2009: Initial recovery to pre-accelerated decline levels (around 9/1/2008)
Performance of the CNK and the S&P 500 during the 2007-08 crisis
We see that CNK’s stock went from levels above $ 19 in September 2007 (pre-crisis peak) to levels below $ 8 in March 2009 (as markets bottomed out), implying that CNK’s stock has lost 60% from its approximate pre-crisis peak. It recovered from the 2008 crisis, to levels above $ 14 in early 2010, increasing 87% between March 2009 and January 2010. The S&P 500 Index fell 51%, from 1,540 to January 2010. September 2007 to 757 in March. 2009. It then reached levels of 1,124, increasing by around 48% between March 2009 and January 2010.
Fundamentals of CNK in recent years
CNK’s revenue increased from $ 3 billion in 2017 to $ 3.3 billion in 2019, mainly due to the increase in revenue per customer. Despite higher revenues, profit declined from $ 2.26 to $ 1.63 during this period due to higher operating costs. However, the company’s revenue fell in 2020, reaching just $ 0.7 billion, due to the pandemic’s severe impact on the movie theater industry, as nearly all facilities were closed during the lockdown. CNK reported losses of $ 5.25 per share during the year as finances were severely affected by the ongoing pandemic.
Does CNK have enough liquidity to meet its obligations during the coronavirus crisis?
CNK’s total debt grew from $ 1.8 billion in 2017 to $ 2.4 billion in 2020, while its total cash flow grew from around $ 522 million to $ 655 million during the same period. However, the increase in the cash balance is entirely due to the additional debt raised. In fact, the company reported a cash outflow of $ 330 million from operations and an outflow of $ 83 million from investing activities. Thus, the high debt burden and negative liquidity from operations and investing activities are short-term risks facing the company.
Phases of the Covid-19 crisis:
- Beginning to mid-March 2020: Fear of the rapid spread of the coronavirus epidemic is reflected in reality, the number of cases accelerating in the world
- End of March 2020: social distancing measures + confinements
- April 2020: Fed stimulus suppresses short-term survival anxiety
- May-June 2020: Resumption of demand, with a gradual lifting of confinements – no more panic despite a steady increase in the number of cases
- Since the end of 2020: Weak, but persistent quarterly results demand improvement and advances in vaccine development boost market sentiment
In view of the constant decline in the number of new cases of Covid-19 in the United States, we expect demand to improve to support market expectations. As investors focus on the expected results of 2021, we believe Cinemark stock has the potential for significant gains once fears surrounding the Covid epidemic are allayed. However, a full recovery to pre-Covid levels seems unlikely anytime soon, as theaters are still not operating at full capacity. Full recovery is only possible when immunization coverage expands, blockages / restrictions are completely lifted, and company facilities are operating at 100% capacity.
While CNK stock may have moved a lot, 2020 has created a lot of price discontinuities that can provide some exciting trading opportunities. For example, you will be surprised at how the valuation of stocks for Netflix vs Synopsis shows a disconnect with their relative operational growth. You can find a lot of these discontinuous pairs here.
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