Even though I was bullish on Cineworld (LSE: CINE) when I wrote about it last week, I was concerned about its liquidity issues. The FTSE 250 multi-national cinema chain has been out of business this year, while its costs mount. Of course it was going to have a funding problem. Clearly, other investors thought so too. So when it issued a release earlier today titled “Significant additional liquidity secured”, it’s little surprise that the Cineworld share price ran up by 20%.
Cineworld share price rises on better liquidity position
The release lists a bunch of measures that will help tide CINE over the present times. These include raising more debt and easier terms on loans, cost-saving measures, and steps to bring forward a tax refund. Cautious investors would argue, and rightly so, that higher debt doesn’t do CINE any favours. Some companies have performed brilliantly despite the Covid-19 crisis. They also have good prospects, which should be rewarding for investors over time. In comparison, CINE doesn’t look quite as attractive. Not only do I agree that there are indeed high performers around, I am a big fan of some, like AstraZeneca and Ocado.
However, I think there’s merit to companies like Cineworld too. When we hold stocks over a long timeframe, like we at the Motley Fool prefer to, there are likely to be ups and downs in stock prices. The winner isn’t just a company that rises along with the tide, but also one that manages poor times well. And right now, I see CINE as the latter kind.
It will survive
It’s not easy to survive through a period like the kind it has seen this year. But things are looking up. It expects cinemas to reopen “no later than” May 2021, and has said that it now has enough liquidity till that time. With three Covid-19 vaccines reporting success in trial results recently, I think that sounds like a reasonable timeframe. If cinemas open sooner than this, things will start looking even better for CINE going forward.
Moreover, I think we need to keep in mind Cineworld is the second largest cinema chain in the world today. I don’t think it’s about to go bust in a hurry, especially at a time when it has been hurt for no fault of its own. Lenders are likely to be more adjusting at this time than others.
The takeaway
As a result, if I was already bullish on the stock last week, I’m even more so now. This is also because it’s share price is still way below where it was even till August this year. That shows, somewhat imperfectly, the extent of share price rise possible going forward. In an article in early November, when it was still a contrarian pick, I had argued that the Cineworld share price may not go back to earlier highs anytime soon, but it will start rising. That’s exactly what has happened. With Covid-19 vaccination expected to start soon and CINE’s liquidity issues sorted, I reckon it’s poised to rise further.
