Cinemas around the world were closed for long periods along with restaurants and bars to stop the spread of the Covid-19 pandemic. During this time, the Cineworld (LSE: CINE) share price effectively collapsed. It fell from 190p to 37p in March 2020. With operations in 10 different countries, Cineworld’s ticket sales were zero for large chunks of 2020 and 2021. The main question to consider is, should I avoid this stock or buy more at these low levels?
Litigation
It is first crucial to mention the recent judgement by the Ontario Superior Court of Justice. This ordered Cineworld to pay nearly $1bn in damages to Cineplex after the former scrapped an acquisition deal. Although Cineworld is appealing the result, the judgement had a catastrophic impact on the shares. When the result was released to the market, the Cineworld share price plummeted 40% to close at 27.5p. There is also the possibility that there might be a dual listing in the United States through its Regal business. Nonetheless, I do view this judgement very seriously and will be watching the price action very closely. While the Cineworld share price did plummet, recent buying gives me some hope; since the fall, the shares have climbed around 38% to 38p.
Encouraging recent results
A recent trading update, from the middle of November 2021, indicated that Cineworld box office revenue for October 2021 was 90% of 2019 levels. In the UK specifically, revenue was 127% compared with the same period in 2019. This came from the release of some delayed films, like James Bond’s “No Time To Die”, which boosted box office revenue. There are many more big films in the pipeline, and this gives me hope of further positive trading updates. While this does not necessarily outweigh the dark cloud of the litigation, it does at least show that Cineworld is functioning reasonably well on a daily basis.
On the other hand, the company has a big debt pile of around $4.6bn that may only get larger with the recent litigation case. Furthermore, revenue has continued to slide over the past two years. For the six months up to 30 June 2021, revenue was $292.8m. For the same period in 2020, this figure was significantly higher at $712.4m. As with many other reopening trades, progress could be halted if governments decide to lock society down again. This is possible if new variants arise. Overall, I think the lockdown risk is small and I am confident cinemas will stay open. Indeed, the UK Government recently decided not to include cinemas in the Covid Pass policy, meaning footfall remained steady.
In conclusion, there has been some alarming news about Cineworld stock in recent weeks. I will be waiting to see how these events impact the share price in the future, and maintain appropriate risk management procedures with this stock.
