Following the coronavirus lockdown measures that have been implemented, it is no surprise that Cineworld’s (LSE: CINE) share price has dropped by 65% in the year to date. Like restaurants and bars, cinemas have also been closed for several months.
Even though its stock price has spiralled, the company is now showing signs of a slight recovery. In the past month, with lockdown measures being gently eased, Cineworld’s share price has rebounded by about 13%.
Fellow-Fool Alan Oscroft notes that before the crash, the Cineworld share price was trading at a price-to-earnings multiple of roughly 35. Now, after the huge depreciation of its market value, the P/E ratio is just 5. This could get value investors excited. But I think it pays to dig a little bit deeper.
Curtains closing?
There are problems at Cineworld. When lockdown measures were implemented, the company closed the 787 sites it operates around the world. When things turn back to normal, it is tempting to imagine that admissions will return to pre-coronavirus levels. But there are other issues for Cineworld.
Firstly, the business has a pile of debt. At the end of 2019, its bank debt was $3.5bn. People interested in the Cineworld share price should note that this is about 10 times the company’s after-tax profit for 2019. In my view, the business needs to pay down its debt urgently. While its cinemas are sitting empty, I imagine the only feasible way to reduce the sum is by way of a refinancing arrangement.
Another threat to the future of Cineworld is the rise of online streaming services. Businesses like Netflix are doing a great job of keeping previous cinema-goers entertained at home. In the past, there has been an argument that people will continue to use cinemas because it offers a different experience to streaming on your television at home.
However, I think the coronavirus might have changed customers mindsets. Will people sacrifice the experience of seeing a film on a big screen in favour of the safety and comfort of their living rooms?
Both of these issues cause me concern over the future of the Cineworld share price.
What next for the Cineworld share price?
As things stand, I believe that Cineworld offers no margin of safety for its investors. It is operating in an industry that is riddled with competitors and disruptors. In addition to these concerns, the company is sitting on a pile of debt. Both of these threats could seriously damage Cineworld’s share price. The lockdown measures that have been implemented around the world might have acted as a catalyst for a company that was already in trouble. The market seems nervous about Cineworld, and I share these thoughts.
At the moment, I would not buy Cineworld shares. For long-term investors, I feel there are much better opportunities elsewhere to buy undervalued shares in today’s market.
Leave a comment