Is Cinemark Holdings Inc (CNK) Set to Underperform? Analyzing the Factors Limiting Growth
Long-established in the Media - Diversified industry, Cinemark Holdings Inc (NYSE:CNK) has enjoyed a stellar reputation. It has recently witnessed a daily gain of 4.38%, juxtaposed with a three-month change of 9.5%. However, fresh insights from the GuruFocus Score Rating hint at potential headwinds. Notably, its diminished rankings in financial strength, growth, and valuation suggest that the company might not live up to its historical performance. Join us as we dive deep into these pivotal metrics to unravel the evolving narrative of Cinemark Holdings Inc.
Understanding the GF Score
The GF Score is a stock performance ranking system developed by GuruFocus using five aspects of valuation, which has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021. The stocks with a higher GF Score generally generate higher returns than those with a lower GF Score. Therefore, when picking stocks, investors should invest in companies with high GF Scores. The GF Score ranges from 0 to 100, with 100 as the highest rank.
Financial strength rank: 4/10
Profitability rank: 6/10
Growth rank: 1/10
GF Value rank: 10/10
Momentum rank: 9/10
Based on the above method, GuruFocus assigned Cinemark Holdings Inc the GF Score of 69 out of 100, which signals poor future outperformance potential.
Company Snapshot: Cinemark Holdings Inc
Cinemark Holdings Inc is a geographically diverse operator in the motion picture exhibition industry in the United States. The company operates around 518 theatres and 5,847 screens in the United States and Latin America. The company generates revenue from filmed entertainment box office receipts and concession sales, with additional revenue from screen advertising, screen rental and other revenue streams, such as transactional fees, vendor marketing promotions, studio trailer placements, meeting rentals and electronic video games located in some of the theatres. Majority of Cinemark's theaters are located in midsize cities or suburbs of large cities.
Financial Strength Breakdown
Cinemark Holdings Inc's financial strength indicators present some concerning insights about the company's balance sheet health. The company's interest coverage ratio of 1.41 positions it worse than 90.45% of 628 companies in the Media - Diversified industry. This ratio highlights potential challenges the company might face when handling its interest expenses on outstanding debt. It's worth noting that the esteemed investor Benjamin Graham typically favored companies with an interest coverage ratio of at least five.
The company's Altman Z-Score is just 0.87, which is below the distress zone of 1.81. This suggests that the company may face financial distress over the next few years. Additionally, the company's low cash-to-debt ratio at 0.21 indicates a struggle in handling existing debt levels.
The company's debt-to-equity ratio is 14.83, which is worse than 98.47% of 786 companies in the Media - Diversified industry. A high debt-to-equity ratio suggests over-reliance on borrowing and vulnerability to market fluctuations. Additionally, the company's debt-to-Ebitda ratio is 9.01, which is above Joel Tillinghast's warning level of 4 and is worse than 89.48% of 637 companies in the Media - Diversified industry. Tillinghast said in his book Big Money Think's Small: Biases, Blind Spots, and Smarter Investing that a high debt-to-Ebitda ratio can be a red flag unless tangible assets cover the debt.
Growth Prospects
A lack of significant growth is another area where Cinemark Holdings Inc seems to falter, as evidenced by the company's low Growth rank. The company's revenue has declined by -9.6 per year over the past three years, which underperforms worse than 72.67% of 955 companies in the Media - Diversified industry. Stagnating revenues may pose concerns in a fast-evolving market.
Lastly, Cinemark Holdings Inc predictability rank is just one star out of five, adding to investor uncertainty regarding revenue and earnings consistency.
Conclusion
Given the company's financial strength, profitability, and growth metrics, the GuruFocus Score Rating highlights the firm's unparalleled position for potential underperformance. While Cinemark Holdings Inc has a strong reputation in the Media - Diversified industry, its financial health and growth prospects raise concerns about its ability to maintain its historical performance. As value investors, it's crucial to consider these factors when making investment decisions.
GuruFocus Premium members can find more companies with strong GF Scores using the following screener link: GF Score Screen
This article first appeared on GuruFocus.
