Cinemark Holdings Stock Nearly Doubled In A Year – What Lies Ahead?

Cinemark Holdings stock (NYSE: CNK) currently trades at $24 per share and is still down 29% from the beginning of 2020. Cinemark Holdings is an American movie theater chain. CNK stock traded at $32 in February 2020 just before the outbreak of the pandemic and is still almost 25% below that level, as well. The stock has gained 95% since its March lows of 2020 compared to the S&P 500 which saw a 77% rise during this period. The stock has outperformed the market as the gradual lifting of the lockdown and successful vaccine rollout has led to expectations of an increase in the number of theaters being functional. Also, stimulus measures are expected to increase demand, which the company can tap as its capacity also gradually increases over the next few quarters. There is still 35% upside potential for CNK stock if it rises to the pre-Covid level, but such a sharp rise after the rally over recent months looks far-fetched at the moment. A significant upside looks possible only when almost all of the company’s domestic and international theaters become operational (as of now 75% domestic and 65% international theaters are open). In the near term, the stock is likely to see an upside of 10%-15% as overall market sentiment gradually improves. Our conclusion is based on the detailed comparison of Cinemark Holdings stock performance during the current crisis with that during the 2008 recession 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 77% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

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 around $19 in September 2007 (pre-crisis peak) to levels of around $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 crashed in 2020, coming in at only $0.7 billion, due to the severe impact of the pandemic on the movie theater business. 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 $426 million to $655 million over the same period. However, the rise in cash balance is entirely 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.

Conclusion

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-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of the spread of the pandemic in the U.S. and contrasts with trends in Brazil and Russia. 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 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.

While CNK stock may have moved a lot, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how how the stock valuation for Netflix vs Synopsys shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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