Cinemark Needs More Than Spider-Man To Justify Its Current Stock Price

Summary

• Spider-Man box office results are very impressive, but many other holiday movie results are disappointing.
• Cinemark continues to report losses and negative cash flow for 3Q.
• While Cinemark was able to do some refinancing, they again face potentially major refinancing problems in three years.
• Cinemark's capitalization valuation per theater is lower than AMC's extremely high valuation per theater.

Holly Guerrio/iStock Editorial via Getty Images

Investors in movie theater stocks, such as Cinemark Holdings (NYSE:CNK), are focusing on the spectacular box office results for the latest Spider-Man movie, but they seem to be ignoring the dismal results of other major holiday movies. While Cinemark is not really a “meme” stock, the stock price is being supported by those arbitraging between Cinemark’s valuation per theater of approximating $7.75 million and AMC Entertainment Holdings' (AMC) $17.9 million total market capital per theater by buying CNK and shorting AMC. Cinemark is highly leveraged, still losing money, and has negative cash flow. While Cinemark may be “cheaper” than AMC, it is still rated a SELL.

Stock Price Percent Change From 12/1/2019

Data by YCharts

North America Market Share (2019)

Source: November 5, 2021 Investor Presentation

Latest Box Office Results

I am using the box office numbers from IMDbPro, a highly respected movie industry organization, for just domestic results because including international results distorts the impact on Cinemark which only has international theaters in Latin America – no European theaters.

Spider-Man: No way Home (18 days) $621,509,396

Ghostbusters: Afterlife (46 days) $123,605,168

Sing 2 (13 days) $92,992,715

Encanto (41 days) $91,566,477

House Of Gucci (41 days) $49,154,888

The Matrix Resurrections (13 days) $31,400,093

West Side Story (25 days) $29,961,268

The King's Man (13 days) $20,234,700

The Spider-Man results were great for theaters. Most of the other results were much less than expected, such as West Side Story. It cost over $100 million to make, but has only about $30 million in domestic box office revenue so far – very disappointing considering it got mostly high reviews.

Attendance at Cinemark U.S. theaters declined 4.9% in 2019 from 2018 and I am not sure if that was caused by the quality of the movies released or because of increased competition from other platforms to see movies.

There should be fairly strong attendance in 2022 because many movie companies postponed release dates in 2020 and 2021 to 2022, but because of Omicron the results could be less than expected. We have to wait and see what happens at this point. The Spider-Man results do indicate people will go to theaters to see certain action movies that are best enjoyed in a theater.

2022 Movie Release Dates

Source: November 5 Investor Presentation

Note: Morbius was recently moved to be released on April 1.

Cinemark Theaters

Cinemark has a total of 524 theaters (324 U.S. and 200 international). They have 86 theaters in Texas, 64 in California, 27 in Ohio, 15 in Utah and the rest in other states. It is important to note that Cinemark only has one theater in New York so they are not impacted by any potential restrictions by New York politicians.

International Theaters

Source: 2020 10-K

Per Theater Valuations

Using 3Q numbers, Cinemark had net long-term debt of $3.82 million per theater, which is significantly higher than $2.33 million net debt per theater at the end of 2019. Equity capitalization per theater is currently $3.93 million using the latest CNK stock price of $17.22. The equity capitalization at the end of 2019 was $7.03 million or a total capital per theater of $9.36 million. The current total capital is $7.75 million per theater.

Continued International Theater Attendance Problems

U.S. theaters have been able to recover somewhat from the pandemic, but their international operations have struggled. Domestic theaters had an average total revenue of $1.159 million per theater for the 3Q, but their international theaters only had $0.297 million per theater. In the past, the average attendance per U.S. theater was only slightly higher than for their international theaters. For example, in 2019 the average attendance was 0.551 million per U.S. theater compared to 0.495 million for international theaters. There is, however, a big difference in revenue per customer. The average ticket price in 2019 was $8.13 in the U.S. compared to $3.61 for their international theaters and average concession per customer was $5.31 compared to $2.18.

Recent Results

Source: 3Q 10-Q

Negative Cash Flow

Cinemark reported a loss of $77.6 million (loss of $0.65 per share) for the 3Q 2021, but they did manage to also report a positive EBITDA of $44.3 million. They, however, had a negative cash flow from operations of $42.2 million for the 3Q and negative cash flow of $167.7 million for the first nine months of 2021. The cash flow results are actually worse than the reported numbers because CAPEX for the nine is only $67 million compared to $304 million for fiscal 2019 before the pandemic. Eventually they will have to increase CAPEX to maintain a quality theater experience. They can’t let their theaters go down the same road as Sears Holdings (OTC:SHLDQ) who allowed their stores to become run down and consumers avoided shopping there. In addition, Cinemark still has $43 million in deferred lease payments as of September 30, which will have a negative impact on cash flow going forward as this liability is eventually paid.

Too Much Debt

While Cinemark was able to refinance some of their debt, they are more leveraged now than before the pandemic. As noted above, their average net debt per theater has increased to $3.82 million from $2.33 million at the end of 2019. In my opinion, it may have been better to issue new common stock to raise cash instead of increasing debt. The window to issue stock was open in 2021, it may not be open again in the future. AMC issued a massive amount of new stock, for example, to stay out of Ch.11 bankruptcy last year.

Long-Term Debt

Source: 3Q 10-Q

Some may consider their $460 million 4.5%’ 25 convertible notes to be effectively equity because the stock price is trading above the conversion price of $14.35, but I am expecting CNK to trade below $14.35 this year, so it is still debt in my opinion. (Note: the 4.5% convertible notes are for qualified institutional investors only – no retail.)

The above table does not include a $100 million revolving credit facility because they did not draw on it as of September 30. The revolver is actually the first debt to mature on November 28, 2024. The $634.8 million term loan is next with a March 28, 2025 maturity.

The year 2025 is a huge wall with multiple debt maturities that need to be refinanced. If CNK trades below the $14.35 conversion price, there could be some major problems rolling over their debt. Since I am expecting much higher interest rates and a more restrictive credit market by 2024, Cinemark faces a difficult financial future because they need an improvement in movie theater attendance on a continuous basis and not just a few times per year with major blockbusters such as the current Spider-Man movie. They need greatly improved cash flow, but they also need to increase CAPEX to keep their theaters attractive for customers.

I am not asserting that I expect Cinemark will be in bankruptcy court in 2025, but I do feel that the refinancing terms could have a very negative impact on CNK investors. They were able to refinance recently because the credit market was hoping that the pandemic was getting better and there would be some return to normalcy. Sorry, but I have serious doubts that movie theater attendance will return to near 2019 levels.

Cinemark Owns 26% of National CineMedia

Cinemark owns 43.161,550 shares or 26% of National CineMedia (NCMI) that has a current market value of $131.6 million, using $3.05 NCMI stock price, compared to Cinemark’s balance sheet carrying value of $139.997 million. National CineMedia is a digital in-theater advertising company. Its stock price was hurt even more than CNK because of the pandemic. While the current market value of NCBI is only about $1.10 per CNK share, investors should monitor the stock price to see if future price changes impact the value of CNK shares.

Data by YCharts

Conclusion

When I find companies within the same industry that have extreme differences in valuation, I do a “paired trade” by shorting the relatively over-priced stock and going long the other stock. (I sometimes use some combination of option trades to establish this paired trade.) This is based on the expectation that even if the long side drops, the short side will drop even more or if the short side rises the long side will rise even more. Because of the meme irrational trading in AMC stock I am not shorting AMC and going long CNK.

I have serious doubts that Cinemark will be able to get back to pre-pandemic theater attendance figures. While their free Movie Fan and subscription Movie Club may help retain some of their customer loyalty, the competition from other media platforms to view movies will continue to peel away movie theater customers in the future. With Cinemark’s over-leveraged balance sheet, I feel that they could face serious refinancing issues in 2025. I, therefore, rate CNK stock a SELL.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in AMC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

If I do short AMC stock I will also be selling AMC put options.