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Does COVID-19 Spell the Beginning of the End for Cinemark?

By Lawrence Rothman, CFA - Mar 24, 2020 at 10:03AM

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The theater chain, already contending with faltering attendance, may find that people are just fine staying home to watch movies.

With more people staying home as a reaction to the coronavirus pandemic, Cinemark Holdings' (CNK 1.29%) attendance will undoubtedly feel the impact. There have already been smaller audiences in movie theaters over the years due to many factors, including streaming services like Netflix. And with new streaming services cropping up, such as Disney+ from Disney, the threat is only intensifying.

In the early 2000s, yearly movie attendance across the entire industry was in the 1.5 billion to 1.6 billion range. But this has fallen to 1.2 billion to 1.3 billion annually over the last several years.

The industry had a nice trick to keep box office revenue growing: It raised prices. This is not sustainable, though. Basic economics says higher prices lead to lower demand. So with fewer people going to the movies already, this leads to the question of whether they will now get used to staying home to watch movies because of COVID-19 theater closures.

A side movie of a movie theater with rows of empty seats.

Image source: Getty images.

Counterproductive investments

Cinemark's management argues that movies are cheap and convenient entertainment. But with average ticket prices increasing and the ability to watch movies from the comfort of your own home, that argument has less weight.

To counteract this, the company has been spending heavily to improve the moviegoing experience. It has been upgrading theaters to include more-comfortable reclining seats as well as advanced sound and picture quality. This has cost a pretty penny: Last year, its capital expenditures were $381 million, a 25% increase from 2017.

I wouldn't criticize a company for investing well, but it hasn't driven people to flock to its theaters. Cinemark's worldwide attendance has barely budged. It was 279.6 million in 2019, compared with 277 million in 2017. Ticket sales also drive concession sales, another major revenue generator. So this is a double whammy.

Add to this the fact that Cinemark has $1.9 billion of debt (57% debt-to-total-capital), and that creates a potential landmine down the road.

Don't get attached to the dividend

Last month, the company bumped up its quarterly dividend per share to $0.36 from $0.34. This is ordinarily good news: It signals management is confident.

But with a number of companies in economically sensitive industries, such as Ford and Marriott International, suspending dividends, it is unclear if Cinemark's payout is secure. The yield is in the 13% range, which sounds attractive, but no one knows if it will slash the payout or even eliminate it. Certainly, based on the current price, the market is skeptical.

The movie theater industry's attendance trend before COVID-19 caused governments to force businesses to shut was not good. Now that people are home, they will no doubt binge-watch their favorite shows and stream movies. I believe they will get used to this and like it so much that more of them will stay home rather than spending an increasing amount of their hard-earned money on a movie ticket.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

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