Listed companies completely wiping out shareholders is something usually only associated with the very smallest companies. Yet I think the Cineworld (LSE: CINE) share price could be heading to oblivion.
A major tangle
The straw that breaks the camel’s back could be Cineworld’s legal battle with rival Cineplex. The crossing of swords has now been dragging on since an ill-timed acquisition attempt of the latter by the former, right as the pandemic obliterated much of the leisure industry. Cineworld may be required to pay C$1.2bn (£700m) in damages awarded to Cineplex for pulling out of the acquisition.
The flip side of this is if an appeal court rules in Cineworld’s favour and it avoids this huge penalty, it’s hard to see any scenario other than a massive – and possibly sustained – share price increase.
The other issues
There are three other major issues for me. One is shorting of the shares by professional investors. Another is Cineworld’s debt, and the third is the increased number of shares in issue.
Turning to the former, new research shows that Cineworld Group is currently the most shorted UK-listed company. The fact so many well-incentivised people are betting against the company worries me as a long-term investor. Of course, they could be wrong and get burnt – many of those that short stocks (ie, bet a share price will fall) have lost money shorting Tesla for instance. In this case, it could be just another red flag.
Cineworld also has a massive debt pile that stood at $8.3bn, although the company should generate significant free cash flow to potentially help meet its debt servicing costs in future, now that we’re avoiding lockdowns.
The number of shares in Cineworld has more than doubled since 2018. So to grow earnings per share is now much harder – simply because there are so many more shares, meaning all earnings are more diluted. Given there’s no dividend, investors need to see growth. The major problem is that there doesn’t appear to be any. Even if there hadn’t been a pandemic – was this a high-growth company?
Any silver linings?
While a good slate of new films including Top Gun: Maverick set to come out, recovering cinema attendance, and the possibility of listing its Regal Cinemas division in the US markets to raise the much-needed cash to pay down its debt, all could help save Cineworld – and potentially make investors money after the shares have fallen so far – overall, I think the shares are a bad investment.
Beyond the reasons above, Cineworld bulls (those backing the shares to rise) can also point to positive cash flow in the fourth quarter of 2021. That could be a prelude to a strengthening of the currently very weak balance sheet.
That’s possible and I hope for holders that they’re right. However, I think with its weak finances, lenders would be unwilling to provide much-needed credit to Cineworld. Ultimately that’s another reason why the share price is so vulnerable to dropping. Clearly, a lot depends on the outcome of the Canadian court case.
A high risk punt
I honestly wouldn’t bet against the shares going to zero and for that reason, there’s no way I’d buy the shares. I can’t think many would argue that the shares are anything other than a high-risk punt.
