Merryn's Blog

Multiplex operator Cineworld is riskier than it looks

With people cutting back on expensive nights out during the recession, cheaper alternatives, such as trips to the pictures, are up. But don't go rushing out to buy shares in cinema operator Cineworld. The stock is riskier than it looks.

With people cutting back on big boozy nights out during the recession, cheaper entertainment such as a trip to the cinema has benefited. That's been good for cinema group Cineworld (LSE: CINE).

Helped by blockbusters such as the latest Harry Potter film and animation hit Up, the group saw revenues rise by 6.5% for the 43 weeks to 23 October. Meanwhile, admissions are up 4% so far this year; the group's market share has risen to 23.8%; and the dividend yield is currently north of 6%.

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Time to pile in then? Well, no. That high dividend yield should serve as a warning that the stock is riskier than it perhaps looks.

First off, advertising revenues look pretty rocky down 27% over the period. And things are unlikely to get better soon. Investors will be waiting to hear what advertising giant WPP's chairman Sir Martin Sorrell has to say about the state of the market this Friday, but so far he has been notably bearish, and analysts expect WPP's third-quarter revenues to be down by around 10%.

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Next, ticket revenues may not hold up either. The average price paid per ticket is £4.60, according to Cineworld. But throw in popcorn and soft drinks (not to mention merchandised products) and multiply the sum by four for a typical family, and suddenly a trip to the pictures doesn't look like such a bargain. That's particularly true at weekends when ticket prices tend to be marked up.

As Altrium Securities tells the Guardian, people can shift from weekends to weekdays, but as they point out "the difference in ticket prices is notable". That could put downward pressure on sales. Meanwhile, cinema goers on a budget always have the option of staying at home and watching a cheaper DVD, or plain old telly instead.

Finally, consumer spending cutbacks mean that shopping centre and leisure park developments prime locations for cinemas "have ground to a halt", which could scupper Cineworld's expansion plans.

The 6.2% yield is attractive, and Altium Securities reckon it's safe, so if you bought into the stock at a lower price (and a higher yield) it's probably worth holding. But while it might be a better bet than most entertainment stocks, the uncertainty over advertising and ticket prices mean there's not enough upside to buy in right now.

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