Is Cinemark Holdings Stock Undervalued At $20?

by Trefis Team
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Cinemark Holdings stock (NYSE: CNK) which currently trades at a little over $20 per share, almost 40% below its level at the beginning of 2020, seems like a good investment option. Cinemark Holdings, which is an American movie theater chain, saw its stock trading over $32 in February 2020 just before the outbreak of the pandemic and is still 36% below that level, as well. The stock has gained 66% since its March lows of 2020 compared to the S&P 500 which more than doubled during this period. The rally in the stock over recent months was driven by the gradual lifting of the lockdown and successful vaccine rollout and widening of coverage, leading to expectations of an increase in the number of theaters being functional. Also, stimulus measures are expected to increase consumer spending power reflected in higher demand, which the company can benefit from as its capacity also gradually increases over the next few quarters. Going back to pre-Covid level means that CNK will have to clock an increase of 60% from here. However, we do not believe that will materialize any time soon. The reason behind this is that although almost all of Cinemark theaters in the U.S. are operating at 50% or more capacity, in other major international markets not all its theaters are functioning due to recent spikes in Covid positive cases. We believe that strong performance in the U.S. market will drive a good uptick of around 40% in the stock in the near term, making it a good investment opportunity, but pre-Covid levels can be attained only once the company starts operating at near full capacity even in the international markets. Our conclusion is based on the detailed comparison of Cinemark Holdings’ stock during 2008 recession vs now in our dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 103% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

In contrast, here’s how CNK stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

CNK and S&P 500 Performance During 2007-08 Crisis

We see CNK stock declined from levels of over $19 in September 2007 (pre-crisis peak) to levels of below $8 in March 2009 (as the markets bottomed out), implying CNK stock lost 60% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $14 in early 2010, rising by 87% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

CNK Fundamentals Over Recent Years

CNK revenues increased from $3 billion in 2017 to $3.3 billion in 2019, primarily due to higher revenue per patron. Despite higher revenue, earnings decreased from $2.26 to $1.63 during this period due to higher cost of operations. However, the company’s revenues dropped in 2020, coming in at only $0.7 billion, due to the severe impact of the pandemic on the movie theater business, as almost all facilities were shut during the lockdown. CNK reported losses of $5.25 per share during the year, with financials being severely impacted by the ongoing pandemic.

Does CNK Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

CNK’s total debt increased from $1.8 billion in 2017 to $2.4 billion in 2020, while its total cash increased from around $522 million to $655 million over the same period. However, the rise in cash balance is mainly due to additional debt raised. The company, in fact, reported a cash outflow of $330 million from operations and an outflow of $83 million from investing activity. Thus, high debt burden and negative cash from operations and investing activity are near term risks that the company faces.


Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
  • October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
  • Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Given the steady decline in the number of new Covid-19 cases in the U.S., we expect an improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Cinemark stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest However, full recovery to the pre-Covid level looks unlikely anytime soon as theaters are still not operating at full capacity. Full-recovery is only possible when the vaccine coverage widens, lockdowns/restrictions are completely lifted, and the company’s facilities operate at 100% capacity.


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