Cineworld shares are falling: should I buy now?

Cineworld shares have fallen over 16% in the past five days. Dylan Hood takes a look at whether now is the time to add the stock to his portfolio.

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Cineworld cinema

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Cineworld (LSE: CINE) shares were hit hard during the pandemic. With lockdowns enforced across the globe, the cinema chain was forced to shut its doors for months. As a consequence, the shares fell over 70% in 2020. So far, the picture in 2022 isn’t much better – the shares are down 16% in the last 30 days and over 6% year-to-date.

However, the world is steadily recovering from the pandemic, and consequently, cinema footfall is steadily increasing. This could help Cineworld rebuild its revenues and meet its heavy debt obligations. Therefore, could now be the perfect time for me to stock up on some cheap shares? Let’s take a closer look.

A good buy?

Although the current share price may not reflect it, I do see a number of positives for Cineworld shares. Firstly, it has just undertaken a massive marketing push to try and draw in consumers. Part of this has entailed cutting its prices to £3 per cinema entry, which seems like a great strategy to harness the increased footfall, and set itself aside from the competition. This growth has been supported by a number of high-grossing movies released in 2022, for example, Spider-Man: No Way Home, which was the first film to gross over $1.5bn at the box office since the Covid-19 pandemic.

In addition to this, the most recent trading update — for the six months up to 31 December — reported that group revenues had reached 88% of 2019 levels. This was a huge increase from the 50% reported in July 2021. More specifically, revenues in the US, Cineworld’s largest market, reached 91% of 2019 levels, highlighting an impressive recovery.

Obviously, the shares look cheap. But when comparing them to competition is where I see the real value. Cineworld currently trades on a mere 2.07 forward price-to-earnings ratio. Cineplex, its big competitor, trades on a forward P/E ratio of 33.4. This highlights the massive value that Cineworld shares offer.

Headwinds for Cineworld shares

While Cineworld shares look cheap, there are still some serious risks ahead of the firm.

The firm is still embroiled with a legal battle with its competitor Cineplex after the Ontario Superior Court ordered it to pay over £700m in damages in December 2021. This was mainly due to Cineworld withdrawing from a proposed takeover deal with Cineplex. After the announcement of this news, the shares fell 39% the next day. If the firm loses this battle, who’s to say the shares won’t fall by this magnitude again?

Losing this battle would also add to the enormous debt pile. In my opinion, this is something the firm’s balance sheet simply cannot afford. A primary reason for this is rising interest rates across the world, which will significantly magnify its debts.

The verdict

Overall, I am not comfortable buying Cineworld shares for my portfolio. While the shares are very cheap, I think this is because investors are realising the tough headwinds that Cineworld has ahead of it. In my opinion, it will take time for the firm to overcome these, and hence I will be steering clear in the meantime.

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.

Dylan Hood 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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