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Here’s why the Cineworld share price is surging today

An illuminated Cineworld sign
Image source: DCM

The Cineworld (LSE:CINE) share price has gained some positive momentum today after the company released a trading update. At the time of writing, the shares are up 10%, pushing the 12-month performance of the stock to just over 58%. That’s quite an impressive comeback for a company close to bankruptcy last year. So how are operations going? And is now the time to add this business to my portfolio?

The Cineworld share price recovery

2020 was, in blunt terms, a catastrophe for Cineworld and its share price. With the pandemic forcing cinemas across the UK and US to close their doors, the company found itself with enormous debts and rent to pay with virtually no revenue coming in. Obviously, that’s a terrible situation for any company to be in. Fortunately, with the vaccine rollout progressing relatively quickly, lockdown restrictions have since been lifted, and cinemas are open once more.

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Today, management released an encouraging update that showed revenue performance getting close to pre-pandemic levels. With a long line-up of delayed blockbusters and pent-up demand from consumers, Cineworld has had little trouble attracting people back to the big screen. Ticket sales for Black Widow, Shang-Chi, Venom, No Time to Die, and Dune have boosted the revenues to around 90% of pre-pandemic levels at the end of October. And looking specifically at its UK operations, revenue actually grew 27% versus 2019 last month.

CEO Mooky Greidinger said: “There are real grounds for optimism in our industry.” Given there remains a long line-up of highly anticipated titles, including Spider-Man, The King’s Man, and The Matrix Resurrections, management is optimistic about the group’s performance throughout the rest of 2021. With that in mind, I’m not surprised to see the Cineworld share price rise on this trading update.

Taking a step back

As exciting as it is to see revenues recovering and even growing beyond 2019 levels, Cineworld still has a long road ahead. Management was forced to take on debt at the height of the pandemic to keep the business afloat. But the balance sheet was already riddled with loan obligations long before Covid-19 popped up.

Throughout the years, Cineworld has deployed an acquisitive growth strategy to expand its network of cinemas. This is how the company became the second-largest cinema business worldwide, driving its share price up in the process. But acquisitions are expensive, so it used a vast array of credit facilities to fuel this growth.

As of the end of June, Cineworld had over $8.8bn (£6.6bn) in outstanding loan obligations, with an average interest rate roughly lying around 6.2%. And with inflation on the rise, interest rates are expected to start climbing, making Cineworld’s debt that much less affordable. With most of the operating profits being gobbled up by interest payments alone, simply recovering to pre-pandemic levels of profitability won’t be sufficient to start deleveraging this business, in my opinion.

Time to buy?

My optimism for Cineworld and its share price has improved on the back of this trading update. However, the high debt level continues to concern me. The solvency risk is simply too high for my tastes. Therefore, I’m still not tempted to add this business to my portfolio today.

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Zaven Boyrazian 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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