This year, the Cineworld (LSE: CINE) share price has collapsed in value. The stock is now trading at its lowest level ever, having fallen more than 90% from its all-time high.
Following this decline, some investors might be wondering if the stock can ever return to its previous highs. Unfortunately, this seems unlikely. While Cineworld remains one of the world’s largest cinema operators, it’s facing unprecedented pressures.
However, that doesn’t mean the stock doesn’t look cheap. If the company can make it through the current storm, the Cineworld share price could double from current levels.
Cineworld share price outlook
Over the past decade, Cineworld has been on a relentless growth drive. The company has expanded rapidly by opening new theatres and buying competitors around the world. Thanks to this aggressive strategy, sales quadrupled between 2014 and 2019.
Much of the company’s growth was funded with debt. This made a lot of sense when the group could borrow at low rates, and creditors were happy to lend to the business as profits continued to expand.
Now that many of the organisation’s theatres are shut, this strategy has fallen apart. The company is still solvent, but it’s gasping for air. Management’s decision to close all of its screens in the UK and US was, in my opinion, a desperate move to stop the firm running out of cash.
From an investment perspective, the company’s problems already seem to be factored in to its current valuation. As the Cineworld share price has declined, the firm’s market value has fallen to such a depressed level, I think it would only take a modest improvement in profitability to produce a big jump in the share price.
For example, in 2019, the business reported net income of £180m. Its current market capitalisation is only £340m.
That said, there are other factors to consider. Cineworld’s debt stands at over $8bn, or £6.2bn. It’s also unlikely customers will return to the company’s theatres immediately after economies begin to open up again. It may be several years before consumer confidence returns.
Potential recovery
These are the reasons why I think it’s unlikely the Cineworld share price will ever recover to pre-crisis levels. But I’m not ruling out a recovery altogether. Even if net income recovers to just 30% of 2019 levels, which is around £54m, the stock is selling at a price-to-earnings (P/E) multiple of 6.3. That looks cheap.
Of course, there’s no guarantee earnings will return to this level. The company needs to sort out its balance sheet quickly or it could collapse under the enormous debt load management has taken on. That’s why I’m staying away.
Still, I think the above illustrates the potential rewards for long-term risk-tolerant investors. Owning the Cineworld share price as part of a diversified basket of UK shares could produce large total returns when the global economic recovery gets underway.
