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Is now the time to buy Cineworld shares?

An illuminated Cineworld sign
Image source: DCM

The Cineworld Group (LSE: CINE) share price was in freefall at the back end of 2021. A lost legal case concerning its aborted takeover of Cineplex and the prospect of heavy damages caused investors to flee for the exits yet again.

Cineworld’s share price has bounced strongly from those 13-month lows, however. That’s despite lasting fears over more debt being piled onto the company’s weak balance sheet. And in recent hours it climbed back above 40p per share following a strong reception to its latest trading numbers.

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Should I buy Cineworld shares following this recent strong momentum? Or should I treat recent share price gains as a dead cat bounce?

Superhero sales

Let’s look at those sales numbers first of all. Cineworld said on Friday that attendances at its movie theatres remained strong despite resurgent Covid-19 cases in its territories. Thanks to blockbusters like Spider-Man: No Way Home, box office sales in December came in at 88% of 2019 levels.

A strong slate of crowd-pulling movies has helped get the crowds back in in their droves. And encouragingly for Cineworld the seat-filling popcorn flicks are set to continue thick and fast. Popular comic book fare like The Batman and Black Panther: Wakanda Forever is scheduled to come down the pipe in 2022, along with other potential blockbuster releases like Avatar 2 and Mission: Impossible 7.

Cineworld cinema

Cineworlds cheap share price

A slew of trading releases from cinema operators show that the allure of the cinema remains as strong as ever. Streaming giants Netflix, Disney, and Amazon’s Prime service have soared in popularity during the Covid-19 crisis. But people still like to take a trip to the flicks to catch the latest movies. I myself took in the full spectacle of watching Spider-Man at my local Odeon instead of settling to watch it on the small screen.

So could now be the time to stock up on Cineworld shares? It certainly offers splendid value for money on paper. Firstly the UK leisure share trades on a forward price-to-earnings ratio of just 9.5 times. On top of this Cineworld’s share price commands a chubby 3.5% dividend yield. This beats the broader average of 2% for FTSE 250 shares by a massive margin.

Worth the risk?

I believe investing in the cinema sector could be a good idea. I just wouldn’t do this by snapping up Cineworld. This is because the company’s massive debt levels are putting me off, debts that could shoot up considerably if the company fails to overturn the aforementioned Cineplex ruling.

At best this debt could have significant consequences for Cineworld’s growth plans. At worst it could push the business back towards oblivion if the pandemic persists and its cinemas are locked down again. I’m particularly tetchy over news that infection rates in Cineworld’s core US market just hit a record daily high of 1.5m. There are plenty of quality cheap UK shares for me to choose from today. So I won’t be taking a chance with high-risk Cineworld despite those fresh trading numbers.

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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. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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