I’ve always held a fairly bearish stance on Cineworld (LSE: CINE) shares. Indeed, the company’s huge debt pile, alongside the devastating impact of the pandemic, has made the company too much of a risk for me. The past month has been far more promising for the cinema operator though, with its share price rising 14%. Over the past year, it has also delivered outstanding returns of 170%, mainly because it has avoided bankruptcy and the vaccine has given cause for shareholders optimism. But recently, I’ve also become far more bullish. Here’s why.
The return of Bond
After being delayed three times, the new James Bond film finally hit the cinemas at the end of September. It was also released in the US at the start of this week. I feel that this has given Cineworld shares the boost they desperately needed.
The initial reaction to the new Bond has been extremely promising. In fact, in its opening weekend, the film had UK takings of £25.9m, higher than any previous Bond movie. It’s also received great reviews, which have corresponded with tickets selling very fast. As Cineworld is the largest cinema chain in the UK, it’s likely that it has been a very large beneficiary of this increased demand.
I also feel that the Bond film may be the catalyst for many customers returning to the cinema. In fact, when I went to watch the film (my first visit to a cinema since the start of the pandemic), it was completely full, and I came away very impressed by the whole cinema experience. Hopefully, this is the same for others. This personal experience is the main reason why I’ve changed my mind on Cineworld shares.
The risks remain
Of course, it would be unrealistic to state that one film could change the fortunes of Cineworld. This means that the multitude of risks I’ve previously highlighted remain.
For example, the company has long-term debt of $4.8bn, while cash only totals around $400m. This is leading to very high interest payments, which the company is struggling to pay due to its current unprofitability. It also has negative shareholder equity, which means that its liabilities outweigh its assets. This signals severe financial distress.
In addition, the ever-growing presence of Netflix, Disney Plus and Amazon Prime are constant threats to the health of the cinema industry. This is a risk for the future.
What am I doing with Cineworld shares?
Although I’m certainly more bullish than I’ve been previously, I’m still not rushing to buy. This is until I can see some further signs that demand will remain beyond the Bond film.
However, I now feel that the Cineworld share price may have significant upside potential. As the current most-shorted stock in the UK, there’s even the possibility of a short-squeeze, especially if it can gain further momentum over the next few months. Although gains are certainly not guaranteed, and there’s still the chance of the company collapsing, I’m going to keep a close eye on this FTSE 250 stock.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon, Netflix, and Walt Disney. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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.