Truth be told, I’m glad not to be a theater owner right now. On top of a weak year for the box office in 2019, movie theaters are facing an unprecedented crisis along with most of the brick-and-mortar world. After initially halving their seating capacity to encourage “social distancing,” the major theater chains are now shuttered entirely.
The National Association of Theater Owners is calling on the U.S. government for assistance. AMC Entertainment (AMC) CEO Adam Aron stated that “we need relief right now” and that “we’re going to have to get liquidity from some place if we all in our industry have expenses and none of us have revenues.”
Although theaters are definitely in a precarious position, some are doing better than others. In 2017, I analyzed the differences between Aron’s company and Cinemark (CNK), the third-largest chain in the U.S. AMC had been mismanaged for a long time, and now its problems are coming to a head. On the other hand, Cinemark has a much better chance of weathering this crisis and emerging from it stronger than its larger rivals.
A Tale of Two Balance Sheets
In a misguided quest to become the largest theater chain in the world, AMC spent several years on a spending spree buying up cinema chains in North America and Europe. To fund the binge, the company loaded up on debt.
Looking at AMC’s recently released annual report, we can see easily see why the CEO is in panic mode. Last year the company had $340 million in interest expense on debt of over $5 billion. Even more worrying are the company’s lease obligations with no revenue. In 2019, AMC had lease costs of $1.07 billion. Against this backdrop, the company is holding just $275 million in cash and has access to approximately $250 million under two revolving credit facilities.
Companies go bust when there is a mismatch between cash flows and obligations. AMC’s performance has already been atrocious for the last few years. Any observer could have seen that the company was one crisis away from total implosion. With theater doors shut indefinitely, there is a real danger that could happen unless the government steps in.
Widely considered the best operator in the business, Cinemark has long taken a more conservative approach to growth while maintaining a strong balance sheet. That strategy could save the company as it faces down its darkest period.
In its latest 10-K, Cinemark stated that it will owe a total of $521 million in interest payments, lease payments, and other contractual obligations in 2020. Then there are salaries for its employees and other general and administrative expenses. Fortunately the company is sitting on $488 million in cash and has access to a $100 million credit facility.
The company hasn’t put out any color on how long it can last under these circumstances without a savior. The balance sheet suggests that Cinemark can easily last through the summer, at least until the immediate crisis is under control and things start returning to normal.
In the last 30 days, Cinemark has lost 65 percent of its value. The stock is now trading at a mere 7 times earnings. It also seems likely that the company will suspend its dividend, which represents a 12 percent payout at the present level.
Much uncertainty remains. We don’t know for sure how long “social distancing” and other measures will remain in place. In the background, Cinemark also must contend with the general decline of movie theaters. Will the coronavirus crisis simply accelerate the trend toward streaming at home on platforms like Netflix (NFLX)?
Even with all of that going on, I still think the stock is too cheap at a P/E of 7. The market is pricing the company like it will soon liquidate itself, which doesn’t seem likely. Although it isn’t a slam dunk by any means, if you have to own a movie theater, Cinemark looks like a far better bet than AMC and other chains crushed by debt.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.
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