Are theatres dead? I found myself mulling over this question all throughout the week following the decision by Regal’s parent company to temporarily close the door to all its theatres across the US and the UK. The second delay of No Time To Die, the 25th movie of the James Bond film series, being the final straw that broke the camel’s back.
We live in an age of technological disruption, as the onset of the internet has birthed many agile companies that have upended traditional industries and rewritten the old order. Netflix killed Blockbuster, then grew to become one of the largest media services providers in the world. There are other tales of this type of rapid disruptive innovation. From Amazon and bookstores, renewable energy and coal, ride-hailing apps and cabs.
Hence, one has to ask if movie theatres are monuments of a bygone era? Their demise hastened by a pandemic whose only cure has been economically brutal stay-at-home orders. This future dashed by consumer shifts that would render Cinemark (CNK) as a relic of the past, a type of Ozymandias where all that remains is the crumbling ruins of its long-abandoned theatres whose only usefulness would be providing a location for thrill-seeking urban explorers. The leather seats and empty popcorn machine telling tales of past glory.
Performance of Cinemark shares and industry peers over the last year
This is the dominant doom narrative now being pushed by analysts, investors, and the larger financial news cycle. Indeed, the sector has been ravaged by the covid-19 pandemic, one of the worst-hit, and now seemingly stares at its extinction as the spectre of a second wave looms. There is no certainty that the already delayed movie slate won’t be delayed again, and the timeline for a vaccine and/or drug is still very much unknown.
The Closing Credits?
Cinemark last reported its quarterly earnings ending June 30, 2020, where it realized revenue of $9 million. This was a year-over-year decline of 99.10% and meant a net loss of $170.40 million from a profit of $101.90 million generated in the previous year.
Cash generated from operations, a key metric for assessing the financial viabity of a business model, was also negative at $138.30 million. The previous year saw Cinemark generate $199 million from its operations.
Against such disastrous pandemic induced financials the doom and gloom narrative that has come to dominate investor sentiment is understandable. More alarming is that there is no timeline for this nightmare to end. What was previously an “unprecedented” quarter now runs the risk of indefinitely becoming the new normal in the future quarters ahead.
Assuming Cinemark cash burn remains constant with its last reported earnings result the company should have enough cash on hand to last for at least nine months to a full year. During its earings call, management stated they undertook certain restructuring actions which included permanently shutting down 20 theaters, 13 of which were in the United States as well as reducing their corporate workforce. The benefits of this should be realized in the future quarters, and should hopefully mean further reduction in their operational cash burn.
Cinemark’s new reality means its common shares currently trade hands at $7.86 per share down from a 52-week high of $37.83. This gives the company a total market capitalization of $917 million, a fraction of its previous pre-pandemic glory. To regain some of this lost ground, the market has to sense a shift to normality, this will only happen once all cinemas nationwide are allowed to open. There are signs of this happening with New York Governor Andrew Cuomo’s recent move to allow theaters outside of New York City to open starting October 23, 2020. New York City is expected to follow shortly after. With this move the last remaining states that have prohibited movie theatres will be sure to follow.
A Mixed World
Respite for Cinemark investors will be somewhat pyrrhic. The pandemic is still raging across most of the USA which opens up the likelihood of a second round of lockdowns and even more delays to an already twice delayed move slate. But the bearish narrative that has dominated investor sentiment over the last few months since the start of lockdowns is myopic.
By taking a look at the world as it is now and mixing it in with overzealous tales of disruption, they fail to take into account that a reality where the pandemic no longer exists will happen. Further, this reality will very well see both streaming and theatrical releases coexisting. There does not need to be one of the other when they can be both. You cannot describe a world where people spend all-time in the confines of their houses as anything other than dystopian. And while there could be a halt to geographic expansion and a tarpering of theatres at fringe geographical markets, a mixed world where theatres coexist with streaming as the pandemic shifts to a distant memory is likely to become the sequel to this movie.
Disclosure: I am/we are long CNK. 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.