I think the Cineworld (LSE: CINE) share price could outperform the market over the next 12 months. This claim might seem sensationalist at first, but I genuinely believe the company has significant potential over the next year.
Indeed, the stock has already outperformed the FTSE All-Share Index by around 8% year-to-date. The Cineworld share price has returned -0.4% compared to -7.8% for the rest of the index.
As the global economic environment and the geopolitical situation remain incredibly uncertain, I think the firm could become a safe haven in stormy waters.
In times of uncertainty, consumers tend to reduce their spending. This could have an impact on Cineworld and its peers in the leisure sector. Nevertheless, I think the company is in a better position than some of its peers, such as restaurants and theme parks, which are far more expensive.
Consumers may decide to avoid pricey meals and go to the cinema instead. In past recessions, there has been evidence of this trend playing out.
Cineworld share price risks
That said, consumers do have more options today. A Netflix subscription is far cheaper than going to the cinema, and it can be used again and again. The rise of the streaming industry is probably the biggest challenge Cineworld faces today. As streaming has become more commonplace the number of customers visiting cinemas has declined.
Companies like Cineworld have been able to offset this decline by offering a better experience. They have launched initiatives such as 3D screenings, film clubs and more comfortable seats. The firm itself embarked on a massive rejuvenation of its theatre portfolio last year, and there is evidence that consumers are paying more to be part of this experience.
Having said all of the above, while I think there is a chance the company might outperform over the next 12 months, this is not guaranteed. It still has to deal with its massive debt pile and a legal battle with Canadian cinema operator Cineplex. Both of these challenges could significantly impact the group’s potential over the next year.
Still, what really matters is getting customers back into theatres. All evidence suggests they are returning, and this is excellent news for the Cineworld share price. More customers mean more income and, more importantly, cash flow.
Generating cash
If the company is able to generate enough cash to start making a dent in its debt pile, I think the market will take another look at the enterprise. If it can move back from the brink, I think the stock could outperform the market in an uncertain environment.
Based on this, I would be happy to add the shares to my portfolio as a speculative investment for the next 12 months. The company does face some significant challenges, but there are also opportunities on the horizon as well.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
