Given the implosion of two major U.S. banking firms, the economy is struggling and will likely continue doing so. Under this context, investing in Cinemark (NYSE:CNK) doesn’t appear to be a wise decision. As a cineplex operator, the company ranks within the consumer discretionary sector. However, Cinemark’s distinct role as a psychological comforter offers a potentially solid contrarian play. Therefore, I am cautiously bullish on CNK stock.
In the spirit of full disclosure, Cinemark, on paper, presents a wildly risky market idea. Sure, CNK stock skyrocketed about 70% on a year-to-date basis. Nevertheless, in the trailing year, shares slipped 17%. Even with such an auspicious start to the new year, Cinemark remains deeply plagued. Combined with its rough financials – including a challenged balance sheet – CNK seems not worth the trouble.
However, CNK stock also aligns with a compelling narrative. Mainly, the box office presents a (relatively) cheap and socially comforting entertainment solution.
Consider the concept of retail revenge or shoppers making up for the troubles they incurred through aggressive retail therapy. True, consumers could always buy stuff on various e-commerce platforms. However, they missed the socialization factor as well as the immediacy of purchasing desired products on demand.
Moreover, assess the broader implications of revenge travel. With millions of people stuck in their homes during the worst of the COVID-19 crisis, the travel industry initially benefited from pent-up demand. As it turned out, people didn’t want to be stuck at home. Instead, they gravitated toward new experiences along with interactions with other people.
Fundamentally, then, the underlying business of CNK stock checks two critical boxes: providing new experiences (via a hotly anticipated flick) and socialization.
CNK Stock Benefits from Long-Established Historical Trends
Founded in 1984, Cinemark itself enjoys a long history. More importantly, the concept of the movies as a psychological support line extends back to the Great Depression. Therefore, if economic conditions worsen, investors shouldn’t be too quick to ignore CNK stock.
Following the horrific events stemming from the Wall Street Crash of 1929, the box office, which had become a cultural institution, became a cultural necessity, according to encyclopedia.com. The education resource states that people frequently “sought meaning and escape in the same movie. Movies also depicted things desired or things lost, all of which Depression audiences could relate to.”
Called the Golden Age of Hollywood, movie studios bolstered the nation during one of its darkest hours. Even more critically, this framework of Hollywood helping hurting households did not become relegated to the exclusive domain of a bygone era. As The New York Times declared in late February 2009, despite the downturn of the Great Recession, Americans flocked to movie theaters.
Interestingly, CNK stock made its debut in the public market in the spring of 2007. As economic woes hit the market, shares stumbled. However, from early 2009 onward, Cinemark bounced back. And it wasn’t until the COVID-19 crisis that severe prognostications materialized.
Now that society stands on the precipice of another major economic downturn, CNK stock might seem like an easy, no-brainer Sell outside of historical context. However, Hollywood – while incurring damage of its own, to be fair – has demonstrated an ability to rise amid the troubles.
The Financials Present Risks
As much as the narrative supporting CNK stock appears enticingly bullish, investors can’t ignore the underlying financials. Here, the plot twist may be stomach-churning for prospective buyers.
Currently, Cinemark’s Altman Z-Score (a solvency metric) pings at 0.5, indicating a distressed business enterprise. Mathematically, the formula also suggests that Cinemark sports a higher-than-average bankruptcy risk in the next two years. Also, the company has a cash-to-debt ratio of only 0.18 times, worse than nearly 80% of the diversified media industry.
Perhaps the most alarming stat is its three-year revenue growth rate (on a per-share basis) of 9.6% below zero. With stats like that, it’s no wonder CNK stock can’t seemingly generate positive momentum.
However, it’s important to note that because of governmental restrictions, Cinemark’s revenue in 2020 fell to $686.31 million. In contrast, the sales tally of 2019 hit $3.28 billion. Since the pandemic, Cinemark has made significant improvements. And as other entertainment options (sports events, concerts) become prohibitively expensive as people lose their jobs, the movies offer a sensible alternative.
Is CNK Stock a Buy, According to Analysts?
Turning to Wall Street, CNK stock has a Moderate Buy consensus rating based on six Buys, three Holds, and zero Sell ratings. The average CNK stock price target is $15.44, implying 7.75% upside potential.
The Takeaway: CNK Stock Has History on Its Side
Despite the frugality movement popular among millennials, both recent and long-term historical trends demonstrate that people need two things — socialization and entertainment. The Great Depression confirmed this, as did the Great Recession. More recently, COVID-19 provided evidence as well. On the cusp of another crisis, CNK stock at least has history on its side.
