Is Cinemark Holdings stock undervalued to $ 20?

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Cinemark Holdings shares (NYSE: CNK) which is currently trading at just over $ 20 a share, nearly 40% below its early 2020 level, seems like a good investment option. Cinemark Holdings, which is an American movie theater chain, saw its shares trade above $ 32 in February 2020 just before the outbreak of the pandemic and is also still 36% below that level. The stock has gained 66% since its March 2020 lows against the S&P 500 which has more than doubled during that time. The resumption of action in recent months has been driven by the gradual lifting of the lockdown and the successful roll-out of vaccines and expansion of coverage, leading to expectation of an increase in the number of wards. functional. 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 a 60% increase 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 not all of its theaters are operating due to recent spikes in positive cases for Covid. . We believe that a strong performance in the US market will lead to a good rise of around 40% of the stock in the short term, which will make it a good investment opportunity, but pre-Covid levels will not be achievable. that once the company begins to operate at almost full capacity. capacity even in international markets. Our conclusion is based on the detailed comparison of Shares of Cinemark Holdings during the 2008 recession versus now 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 103% from the lows seen on March 23, 2020, with the Fed’s multibillion-dollar stimulus package keeping the economy afloat during the extended lockdown and the vaccination campaign allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

In contrast, here is how CNK stock and the broader market behaved during the 2007/2008 crisis.

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 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 turnover grew 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 mainly due to additional borrowings raised. In fact, the company reported a cash outflow of $ 330 million from operations and an outflow of $ 83 million from investing activities. Thus, a high debt burden and negative liquidity from operations and investing activities are short-term risks facing the company.

Conclusion

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-September 2020: Resumption of demand, with the gradual lifting of blockages – no more panic with the number of cases seeming to have reached a plateau
  • October 2020-February 2021: unprecedented surge in Covid cases force a new round of lockdowns across the country
  • Since March 2021: The current vaccination campaign and the gradual reopening are leading to a demand improvement – strong market sentiment

Given 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 to make solid gains once fears surrounding the Covid epidemic are allayed. 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.

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