Fancy the Cineworld share price as a recovery buy? Here’s what you need to know

The Cineworld share price is down 75% in 2020, and it’s catching the eye of recovery investors. But you need to know a few things before you buy.

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Preparing a budget during a pandemic

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Cineworld (LSE: CINE) makes me think of all those missed opportunities for buying super cheap shares in the early weeks of the stock market crash. I was looking at Next only today, and lamenting the long-gone chance of snapping up top quality shares when they were down at 3,311p. They’re up to 5,899p now. But the Cineworld share price hasn’t recovered yet. So is it an overlooked bargain buy?

Cineworld shares are down a bone-crunching 75% so far in 2020. And a brief resurgence in June soon came to an end. Compared to the FTSE 100‘s loss of 21%, that’s an especially bad result.

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The effect of the Covid-19 lockdown on the cinema business is clear enough. But a simple reversal of the lockdown might not be enough to get the Cineworld share price moving again. A stock market crash like this helps sort out the financially secure from the weak. And those going into a slump with weak balance sheets just might not make it out the other end.

Lessons from the crash

My Motley Fool colleague Royston Wild has reflected on what he’s learned from his experiences as a Cineworld shareholder. His first lesson is to beware of debt. Back when the Covid-19 virus was still in its pre-human phase, Cineworld had managed to rack up net debt of around $3.7bn (£2.8bn). A lot of that was due to acquisitions, and it shows that expanding a business through borrowing can come back and bite. Oh, and to put that debt into perspective, the current Cineworld share price equates to a market cap of just £689m.

But even so, Cineworld’s current valuation does make it look temptingly cheap. We need to be cautious about analysts’ forecasts at the best of times. And right now, many of them are little better then random guesswork. But with that in mind, forecasts for Cineworld put the shares on a 2021 P/E of just 3.8.

I don’t know how accurate that will turn out to be, obviously. But I do think Cineworld could get back to pre-pandemic levels of business reasonably quickly. It is, after all, one of the biggest cinema chains in the UK and US. And despite gloomy prognostications we’ve been hearing from some quarters, I reckon any thoughts about the death of the cinema industry are premature.

Further Cineworld share price falls?

But for my optimism to become reality, Cineworld first has to survive. I think it will, but at a cost. The company did secure some additional liquidity in June via a new $250m secured debt facility. But that has a maturity of 2023, so it’s a bit of a short-term stop-gap. With so much debt already needing to be serviced, I can see the company needing to raise cash via a new share issue. And it could be a big one, significantly diluting existing shareholders.

I do think Cineworld has a long-term future, but I think the short-to-medium term could be painful. And I think the Cineworld share price could fall even further.

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