Why the Cineworld share price rose 20% in January

The Cineworld share price was on a tear in January. Our writer wonders if he should consider buying as the reopening trade gathers pace.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Key points

  • Strong December trading suggests demand is returning to normal
  • Cineworld generated positive cash flow in Q4
  • Debt problems and legal woes mean shareholders could still face big losses

The Cineworld (LSE: CINE) share price rose 20% in January. With the pandemic seemingly easing and Covid restrictions being lifted in the UK, my guess is that investors were buying into the reopening trade.

However, Cineworld shares are still worth 75% less than they were two years ago, at the start of the pandemic. Should I look at this as a buying opportunity for my portfolio, or are there hidden risks?

Let me explain why the stock rose in January — and what I think will happen next.

December boost lifts shares

The good news is that customers are heading back to the cinema. In January, Cineworld said revenue in December reached 88% of 2019 levels, thanks to popular new films like Spider-Man: No Way Home.

Even better, Cineworld managed to achieve positive cash flow in the final quarter of last year. That’s an important milestone on the road back to profitability, in my view. This should mean — hopefully — that the company didn’t need to draw any further debt to support its operations during the quarter.

The year ahead looks promising too. New films due for release include The Batman and Top Gun: Maverick — potential blockbusters.

I’m worried about the numbers

I’m confident cinemas will make a good recovery. I don’t think we’ll stop wanting to watch movies on the big screen.

What worries me is that the Cineworld share price could start falling again, due to the group’s financial situation. Cineworld’s latest accounts show net debt of $8bn. The company is also appealing against a recent legal ruling that could add a further C$1.25bn of liabilities.

Broker forecasts suggest Cineworld’s operating profit could bounce back to $680m in 2022. Unfortunately, this figure is calculated before financing costs, such as interest payments. My sums suggest these are likely to total at least $600m in 2022 — wiping out most of the group’s profits.

I think the pressure is mounting on CEO and shareholder Mooky Greidinger. This week, the company said it is now trying to reschedule some of its debt repayment obligations. While these talks are ongoing, the company has asked some of its lenders to waive, or overlook, any non-payment for a period of time.

Restructuring the group’s debts could push repayment dates further in the future. It might be enough to save Cineworld from having to raise money by selling new shares. But if an equity raise does go ahead, I think existing shareholders could see the price of their stock collapse.

Cineworld share price: my decision

Cineworld is the world’s second-largest cinema chain, with a big presence in the key US market. I think we’ll see a strong recovery in customer numbers over the coming year.

However, the company’s financial situation carries too many warning flags for me. There’s no way I can predict what might happen.

I have a golden rule in situations like this — stay away. I’ll be taking a close look at Cineworld’s 2021 results when they’re released in March. But, for now at least, Cineworld shares are far too risky for me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head 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.

More on Investing Articles

UK money in a Jar on a background
Investing Articles

With a 10.1% yield, should I buy this FTSE 250 income stock?

Our writer looks at an income stock that’s kept its dividend unchanged for five years. But is it high enough…

Read more »

Investing Articles

Up 23% in a month, can this FTSE 100 stock continue to soar?

Airtel Africa's recently been the FTSE 100’s top-performing stock. With huge opportunities for growth ahead, is it set to continue?

Read more »

Investing Articles

£20,000 in savings? Here’s how an investor could use it to target an eventual £980 of passive income each month

Our writer demonstrates how an investor could aim to earn close to £1,000 each month in passive income from a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

£10,000 invested in the S&P 500 at the start of 2025 is now worth…

Since the start of the year, the S&P 500's underperformed the FTSE 100. And Stephen Wright thinks investing in the…

Read more »

Investing Articles

Is this a turning point for the Diageo share price?

The Diageo share price is at an eight-year low. Is this FTSE 100 favourite simply too cheap to ignore? Roland…

Read more »

Investing Articles

As the FTSE 100 hits record highs, should I sell my shares and buy an index fund?

Our writer’s portfolio lagged the FTSE 100 last year, but he’s not giving up on stock-picking and highlights a recent…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

£10,000 invested in Lloyds shares 6 months ago is now worth…

Lloyds shares have performed well over 12 months but have broadly disappointed investors over the long run. Dr James Fox…

Read more »

Investing Articles

£20,000 in savings? Here’s how investors can aim for a £4,000 monthly second income

Millions of investors use the Stocks and Shares ISA as a vehicle to build wealth and generate a second income.…

Read more »