Is the smoke detector working?
Is the smoke detector working?

Another interesting day on the stock market. The Cineplex movie theater chain lost 54% of its value today:

Illustration for article titled Stock market action - Cineplex
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And the main reason for the big drop? Well not only are people holding off when it comes to going to the movies, but this coronavirus thing is also impacting the acquisition of Cineplex by Cineworld.

Apparently Cineworld might not be able to meet their debt commitments

And you may wonder... how can they buy a company like Cineplex if they end up where they have trouble paying their own debts?

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My guess is if that happens, then the acquisition won’t happen.

And speaking of debt, Cineplex has $625 million of their own debt.

Regardless of that though, at this price, the stock is cheap.... cheaper than it was back during the 2008 financial crisis. Cheaper than it was in the 2003 tech bust.

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But it might get cheaper over the upcoming week.

In times like this, the most important thing is whether the company has enough cash to weather the storm.

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They have CAD$26 million in cash and another CAD$168 million in receivables.

http://irfiles.cineplex.com/Attachments/NewItems/Q4%202019%20Press%20Release_20200212004511_0.pdf

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Given their quarterly costs are $93 million for film costs and $29 million for interest/lease expenses, the amount of cash on hand, I estimate they can survive one really bad quarter.

Two really bad quarters and things will get really bad for the company.

And if the virus situation were to drag on for 3 quarters, it could bring the company to its knees.

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Also note that it seems they put their monthly $0.15/share dividend on hold... which was a wise move.

If China is anything to go by, it seems it will take 2-3 months for things to start looking up again... the equivalent of one really bad quarter for sure. Then it’s a question of how quickly people are willing to go back to seeing movies and other stuff that involves crowds in public. I’m willing to bet that by Q3, people will be back to seeing movies and doing other stuff as before.

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So I think Cineplex will likely weather this storm intact... but it’s far from guaranteed.

If these shares go down to a ridiculously cheap level like $5/share, I may snap up some shares.

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