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Bear of the Day: Cinemark Holdings (CNK)

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Virtually all US businesses are feeling the negative economic effects from the outbreak of Covid-19. Many are operating in sub-optimal conditions with most employees performing their essential job functions from home. In most cases, that’s a less than optimal set of circumstances for operations, but at least they’re staying in business.

Some retail and customer oriented businesses are adapting by offering a reduced set of services like curbside pickup of items ordered online and restaurant meals served in to-go packaging. Just like having all employees working from home, it’s far from ideal, but still keeps at least some employees working, turns over inventory and generates some cash flow – all of which may prove essential to the eventual survival of those businesses.

Some unlucky industries don’t have any practical way to offer their goods and/or services at all during the lockdown. Businesses that depend on having groups of people congregate in public places – not in a way that’s tangential to their business, but as the essence of the business itself – now find themselves with no business at all.

Movie theater operators are one such industry. There is simply no practical way for them to offer any sort of safe experience to moviegoers, so they are completely shut down and will remain that way for the foreseeable future.

With more than 4,500 screens in 38 states as well as operations in Mexico and Central America, Cinemark Holdings (CNK - Free Report) figures to be among the hardest hit by social distancing and state and local “shelter-at-home” mandates.

Movie theater chains have been fighting off the challenge from other formats – most notably home streaming – for many years, but this shutdown might well be the deathblow. While many producers, directors and movie buffs consider the big screen the ultimate canvas on which to express the cinematic art form, the majority of viewers would prefer to have content available in streaming form so that they can watch where and when they choose.

Formerly, the studios gave theaters an exclusive period of 90 days before releasing first run movies in other formats, a move that was reinforced by the rules of the Motion Picture Association of America which requires theatrical release for consideration for Academy Awards.

In response to the virus-related shutdown, NBC Universal made several highly anticipated new releases available in an online pay-per-view format and other studios are expected to experiment with their own alternative release formats.

Cinemark Group had been foundering lately with stagnant revenues, earnings and share price over the past several years. Over the past month, those shares have been in freefall, hitting an all-time closing low of $6.58/share on March 18th - down nearly 85% from the 52-week high of $43.51/share.

As the details emerged about the $2 trillion relief package making its way through Congress, CNK shares bounced in the hopes that government assistance would help keep movie chains afloat - closing at $12.30/share on Friday.

Unfortunately, any bailout funds are likely to be a proverbial drop in a bucket for the company which has seen the Zacks Consensus Earnings Estimate fall from $0.42/share to just $0.04/share for the current quarter and from $0.80/share to a loss of ($0.04)/share in Q2.

The recent rally because of bailout optimism looks to be a good chance to exit long positions in an industry for which the viral pandemic is merely the latest in a long line of adverse trends.   

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