The Cineworld (LSE: CINE) share price has jumped 22% over the past month.
This would be an impressive performance for any stock, but it is even more unusual for this enterprise. Concerns about the group’s prospects and high debt levels have kept investors away from the shares for the past two months.
Between the middle of July and middle of September, the Cineworld share price was dead money. However, over the past 12 months, shares in the cinema group have returned 84%, including the recent bounce.
The question I want to know the answer to is this: is that bounce just a short term market phenomenon, or does it signal a genuine shift in sentiment among investors?
Cineworld share price performance
It seems to me that there is one main reason why the stock has performed so well over the past few weeks.
Tickets for the new James Bond film, No Time To Die, have been flying off the shelves as consumers line up to view this blockbuster release. The owner of the theatre group Odeon has already predicted that the opening will be its biggest in two years.
A total of 175,000 tickets have been sold for the film in the past two weeks. Cinema attendance this month is expected to be a tenth higher than in September 2019.
This is incredibly positive news for Cineworld and the rest of the cinema and entertainment industry. It seems to suggest that consumer confidence is finally returning. This bodes well not just for the next few weeks but also the next few months and potentially years.
Indeed, some analysts had speculated that the pandemic would bring the curtain down on cinemas. They argued that after spending 12 months locked down at home, with a multitude of streaming services meeting all of their needs, consumers would not want to leave their properties to go to the cinema ever again.
Sales figures for the new James Bond film seem to refute this speculation.
Shift in sentiment
This shift in sentiment may also be one of the reasons why the stock has powered higher in recent weeks. The Cineworld share price was one of the most shorted stocks on the London market coming into September.
Hedge funds, both here in the UK and across the pond, were betting that the company’s stock would continue to decline if cinemagoers did not return. If revenues remained depressed, the corporation would struggle to service its debt mountain, they argued.
The number of cinema tickets sold for the new James Bond film may have inspired some funds to change their opinion. And when traders short or bet against a company, if they decide to reverse their position, they have to buy the stock back they have borrowed from others to bet against the shares.
The combination of short-sellers buying back stock and investors buying because they believe in the company’s prospects can create a double tailwind.
This combination of factors may explain why the Cineworld share price has charged higher in recent days.
Challenges to overcome
While the company has benefited from a dramatic change in investor sentiment over the past few weeks, its underlying fundamentals are still creaking.
According to its latest trading update, which covered the six months to the end of June, the organisation’s borrowings totalled $4.6bn (£3.4bn) at the end of the reporting period. To put that into perspective, even after the recent performance of the Cineworld share price, the company’s entire market capitalisation is only £1.1bn today.
In other words, Cineworld owes three times more than it is worth as a business.
In the immediate future, this is not a problem. The company’s cash balance was $437m at the end of June. It burnt $45m a month during the first half of the year, but that was when most of its theatres were closed.
With cinemagoers returning, I think it is likely this cash burn has reduced significantly. The company could even be in a positive cash flow position.
Unfortunately, while it looks as if the company’s financial position is improving, it has a mountain to climb.
In the first half of the year, interest costs on debt totalled $417m. To put that into perspective, for the 2019 financial year, the company reported an operating profit of $724m.
These numbers imply the enterprise will have to return to 2019 levels of profitability and then some just to pay its interest costs.
Cineworld share price verdict
Considering all of the above, I think the recent performance of the company’s shares does not signal a genuine shift in sentiment. I think the performance reflects short-term fundamentals and excitement around the new James Bond film.
Looking past the release of this new film, I think it will be incredibly difficult for Cineworld to both maintain and reduce its debt pile. And as long as this debt mountain remains in place, I think the market will continue to view the business with scepticism.
What’s more, the pandemic is still raging around the world. Another lockdown would inflict yet more pain on this heavily wounded business. It may not be able to survive another six months of theatre closures.
That being said, management is considering a listing of the company’s US business. This may free up some capital for the group to use to reduce borrowings, which would be a big step in the right direction, in my opinion. However, before taking a position, I would want to wait and see how such a capital raise would impact the Cineworld share price.
Therefore, I will continue to avoid the stock until there is more clarity on its balance sheet situation.
