The Cineworld share price is up 23% in one week! Here’s what I’d do now

Despite a short-term surge, the Cineworld share price is still heavily down from January. Jonathan Smith assesses whether buying now is a risk worth taking.

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The stock market crash threw up a lot of good investment opportunities in March. With the broader FTSE 100 index down over 30% at some points, the sell-off was seen across the board. Five months on, the divergence between individual share prices is clear to see. Some stocks have made back all of the losses, others not so much. The Cineworld (LSE: CINE) share price has struggled to recover and is still down 73% from the start of 2020. But with a recent surge over the past week, has the share price seen the bottom?

The year so far

Cineworld entered 2020 already on the back foot. The giant cinema operator has struggled with a mounting debt pile for some time. As a result, 2019 saw it reshuffle its capital structure several times in order to keep liquidity flowing. For example, it processed several sale-and-leaseback transactions on US sites in order to generate short-term cash to pay off a loan of roughly $550m.

Even with the full-year 2019 results (released in March 2020) showing growth for the business, the Cineworld share price was falling. Total admissions rose 9%, with profit increasing to over $1bn. Yet this was largely overlooked as the world headed into lockdown. Cineworld operates in 11 major markets, all of which suffered heavily from the pandemic. 

With lockdown restrictions in place, it naturally had to close its sites, causing revenue to grind to a halt. Investors knew this too, hence the Cineworld share price dropping from 138p at the start of March down to 49p at the end of the month. This was a fall of a painful 64%.

Lockdown easing = Cineworld share price higher

We’ve seen a strong correlation between the share price increasing over the past few weeks as restrictions have been eased (mainly in the UK and Europe). A 23% bounce higher in the past week leaves the price in the high 50s, with plenty of room to move higher still.

The main thing investors need to think about is how much of an impact has the pandemic had on the overall business. As a gauge, the current price-to-earnings ratio is just below 4.5. In December of last year, it was around 13.5. So currently, the market is pricing a premium of £4.50 for every £1 of profit that the business makes. If you think that this is too low, then the current Cineworld share price represents a good level to buy in at right now.

Aside from the numerical reasoning, I think you have to follow your broad instinct on the possibility of a second wave of the virus this winter. As mentioned above, the firm has high debt levels. Another closure of sites this year would likely put an even tighter squeeze on cash flow and financing. This would likely see the Cineworld share price take another tumble as the viability of survival for the firm comes into question again.

Risk versus reward

It’s a tough stock to make a call on. Personally, I’d invest a small amount into Cineworld now, to try to piggy-back on the positive sentiment in the market. However, I’d keep a very close eye on it over the course of the winter, and look to sell if the situation with the virus materially worsens.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

jonathansmith1 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.

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