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Industry revenues are set to surpass pre-COVID levels in 2024, signaling strong growth despite streaming's rise.
Strong liquidity, steady debt reduction, and consistent earnings beats position Cinemark well for future growth.
While trading near its historical average, recent insider selling and a strong stock rally warrant caution before investing.
Background
The COVID-19 pandemic in 2020 created sweeping disruptions across industries globally, but it also transformed some sectors in ways that were not initially expected. One of the most notable examples is the transformation of the workplace, where many companies realized that downsizing office spaces could reduce costs without negatively impacting productivity.
This realization followed broader shifts in consumer behavior, such as the perceived rise of online shopping during lockdowns. However, in industries like retail, many analysts underestimated the resurgence of in-person shopping as consumers returned to malls and stores post-pandemic. Stocks in companies like Simon Property Group saw notable increases as a result.
Similarly, the cinema industry has faced skepticism, with many questioning whether movie theaters can survive in the age of streaming. While it's true that streaming services gained significant ground during the pandemic, I believe that concerns about the future of cinema are overstated. The narrative of a permanent shift from theater visits to streaming is overly pessimistic, in my view.
The Resilience of Cinema Post-COVID
Cinema revenues in 2020 were hit hard, falling by nearly 75% across the industry due to lockdowns, closures, and social distancing restrictions. However, as we head into 2024, industry-wide revenues are projected to surpass pre-pandemic levels, signaling a strong rebound. I believe this recovery is largely driven by the return of moviegoers, who are eager to return to the big screen despite the growth of streaming platforms.
The ongoing strikes by the Writers Guild of America (WGA) and the Screen Actors Guild (SAG-AFTRA), which lasted for over 110 days in 2023, delayed the release of significant film material. According to Fitch Ratings, this led to an estimated $1.6 billion in delayed content. However, with the recent settlement and new contracts that include raises and protections from AI disruptions, the outlook for cinema appears much more stable. Additionally, studios are beginning to reverse their previous shift to direct-to-consumer (DTC) streaming models, recognizing the long-term value of theatrical releases. The financial success of movies like Barbie and Oppenheimer is proving that the theatrical window is far from obsolete.
Looking at the broader economic environment, I believe the outlook for cinema is more promising as we move into 2025. Inflation pressures are easing, real wages are on the rise, and consumer sentiment is improving. These factors are likely to drive stronger discretionary spending, with cinema benefiting as consumers increasingly engage in social experiences like moviegoing.
Cinemark, in particular, stands out in the industry for its strong financial management. With its superior balance sheet and liquidity compared to competitors like Cineplex and AMC Entertainment, Cinemark is positioned well to weather economic headwinds. Moreover, the company has been steadily reducing its debt load, which should help it secure a credit rating upgrade by 2025-2026, improving its cost of capital and financial flexibility.
Valuation and Financial Metrics
Currently trading at a price-to-earnings (P/E) ratio of 18.48 and a forward P/E of 16.75, Cinemark is priced around its historical average, taking into account the post-pandemic recovery and macroeconomic backdrop. Since 2009, the company has traded at an average P/E of 16.30 (excluding the pandemic years of negative earnings). While its current valuation isn’t necessarily a "steal," it’s certainly not overpriced given the significant improvements in earnings and debt management.
However, it's important to note that the company has experienced a strong stock price rally over the last year—up nearly 120%. While this reflects the market’s optimism, there are some risks to consider. Cinemark’s leverage ratios, although improving, remain a concern. The company's interest coverage ratio is low at around 1.7, and while it has decreased its interest expense slightly in 2024, its ability to sustain EBITDA margins will depend on continued strong box office performance and ticket price growth.
Another bearish signal, and perhaps the most noteworthy, is recent insider selling. CEO Sean Gamble sold $4.45 million worth of shares in December 2024, representing 16% of his holdings. While insider selling is not inherently negative, the volume of selling in recent months raises questions about whether executives believe the stock has peaked.
On the flip side, the most compelling bullish case for Cinemark right now is its ability to consistently outperform earnings estimates. The company has posted seven consecutive earnings beats, averaging +118.14%. If Cinemark continues to deliver strong financial results in the upcoming quarter, it could reset expectations and drive the stock higher. Given the improving sentiment around the broader consumer economy and the recent surge in moviegoing, the company could see further upside, especially if it maintains or improves its free cash flow (FCF) margins.
Conclusion: Patience is Key for Investors
While Cinemark’s stock has rallied significantly in the past year, and while its outlook is generally positive, it’s important to remember that the company is not yet a "buy" at these levels. The stock is near fair value, with upside potential contingent on strong quarterly earnings and continued progress in deleveraging. A credit rating upgrade or a better-than-expected performance in Q4 2024 could provide a catalyst for further growth.
Ultimately, the theater business is not dead—and companies like Cinemark are well-positioned to capitalize on the revival and endurance of the moviegoing economy. However, investors should exercise caution and wait for a more favorable entry point, particularly in light of recent insider selling and the potential risks in the broader macroeconomic landscape.
Sources Cited
OpenInsider. “Insider Trading: CNK.” Accessed December 23, 2024. http://openinsider.com/search?q=CNK.
Fitch Ratings. “Fitch Revises Outlook for Cinemark to Stable; Affirms LT IDR at ‘B.’” March 22, 2024. https://www.fitchratings.com/research/corporate-finance/fitch-revises-outlook-for-cinemark-to-stable-affirms-lt-idr-at-b-22-03-2024.
Stock Analysis. “Cinemark Holdings, Inc. (CNK) Financials.” Accessed December 23, 2024. https://stockanalysis.com/stocks/cnk/financials/.
YCharts. “US Real Average Hourly Earnings.” Accessed December 23, 2024. https://ycharts.com/indicators/us_real_average_hourly_earnings?ref=tippinsights.com.
Statista. “Cinema - Worldwide.” Accessed December 23, 2024. https://www.statista.com/outlook/amo/media/cinema/worldwide.