Shares in Cineworld Group (LSE:CINE) have had a miserable time lately. In May 2017, the shares traded at just over 726p. As I write, they trade at around 31p. That’s quite a decline. To me, it prompts the question: how low can the Cineworld share price go?
Why did it fall?
The reason for the precipitous fall in the Cineworld share price is fairly straightforward. Quite simply, going to the cinema became difficult or impossible during the global pandemic. As a result, Cineworld was unable to generate revenue, but still had costs associated with its business. Worse still, streaming services have made films available to viewers without them needing to leave the house.
According to management, though, there is reason for optimism. One source of optimism is a promising line-up of films set to premiere in 2022. Another is the idea that people signing up for streaming services have increased their interest in films, making people with streaming subscriptions more likely to visit the cinema. A third is the investments that Cineworld has been making in order to make its experiences more immersive than watching films on TV.
The company’s stock, however, seems unaffected by this optimism. Over the last week alone, Cineworld shares lost around 24% of their value. They seem to me to be heading downwards with no signs of reversal. So let’s take a look at what might stop the slide in the Cineworld share price.
Fundamentals
The most obvious thing that might stop such a slide is support from its balance sheet. If a company’s stock falls far enough, it might reach the point where the entire company trades for less than its working capital, or the value of its tangible assets. Unfortunately for Cineworld’s shareholders, I don’t see how either of these is likely to provide valuation support for the stock.
In the case of working capital, Cineworld’s is negative. By itself, this isn’t a problem. In some cases, it can be a good thing. Companies such as Amazon.com employ a negative working capital model as part of their business plan and do so very successfully. But for a company like the cinemas giant, negative working capital means no possibility of the decline in its share price being stopped by the stock sliding below the company’s working capital.
I think that something similar might be true of the company’s book value. It does have a positive book value. But the company has taken on so much debt that I struggle to see how its book value will provide any valuation support to its falling share price.
By way of illustration, the amount of interest Cineworld pays on its debts has increased by around 220% since the end of 2018. Further, the company’s total debt has increased by 113% over the same period. As a result, the book value of the shares has fallen dramatically. With spiralling debts and higher interest payments (even before we get to the issue of rising interest rates) I find it hard to see how its balance sheet provides any valuation support to the falling stock. As I see no limit to how far Cineworld’s share price might fall, I’m staying well clear.
