This share price has fallen over 60%. Should you buy?

Andy Ross takes a look at whether a much cheaper share price makes this FTSE 250 company potentially very profitable.

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Even as many shares have bounced back from the worst of the market crash in March, that’s not the case for every industry. Transport has been particularly hard hit. This creates an opportunity for long-term investors to find a cheap share price. 

Shares with recovery potential

So far this year, shares in transport group National Express (LSE: NEX) have fallen by over 60%. However, before Covid-19 hit the share price, it had been rising steadily most years since the 2009 financial crash. It’s not fundamentally a bad company. Even through this crisis and operating at reduced capacity, it has remained cash flow positive.

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The problem is more of an industry and sentiment issue, rather than a problem with National Express itself. Go Ahead, which is roughly comparable and in the same industry has also seen its shares drop heavily. 

National Express’s chief executive will be leaving to join housebuilder Persimmon after a decade in charge. A new, as yet to be confirmed, leader of the company could provide a boost for the group.  

Showing that National Express is usually a good company is the fact that between 2015 and 2019 revenues rose from £1.9bn to £2.7bn. While at the same time, profit before tax rose from £124m to £187m. 

It also generates most of its earnings outside the UK. Morocco is a market where it has had notable success in recent decades. It’s an established operator which I suspect can move up a gear soon. I’d be happy to invest in this usually profitable business as a potential recovery play. 

A falling, cheap share price I’d avoid at all costs

A share I wouldn’t touch is Cineworld (LSE: CINE), despite its heavy share price decline. The balance sheet looks weak with high levels of debt. Especially when compared to shareholders’ equity. This probably explains why the share price has fallen from around 320p as recently as April 2019 down to a price of around 45p at the time of writing.

The lockdown has really damaged this already weak business. The business is burning through cash as its cinemas have sat empty.

On top of this, management is about to be distracted by a huge legal battle with a rival as the result of Cineworld pulling out of an acquisition it had agreed to pre-pandemic.

Even though the shares are cheap, I think in the long term there’s potential for them to fall even further. The future is in streaming and the pandemic has just accelerated this trend. Cineworld can try to buy growth with acquisitions, but for me that just further weakens the company and simply delays its decline.

A combination of a weak balance sheet, a changing industry, upcoming legal battles and a management that likes big acquisitions even when the balance sheet is stretched all make me nervous.

Cineworld is a low share price I’d avoid at any cost. Even cheap shares can continue to fall in value.

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Andy Ross owns shares in Persimmon. 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.

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