How low must the Cineworld share price go to become attractive?

Henry Adefope wonders if there’s any light at the end of the tunnel for Cineworld shares as the price continues to flatline.

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The last time I discussed the Cineworld (LSE:CINE) share price, I highlighted the deep decline in its value over the last three years, and how I didn’t see a near-term end to its decline.  

So, I’m not surprised to see that the price has fallen even further since then, from 28p on 6 May down to around the 20p mark today.

I find it remarkable that just five years ago its share price was near 700p.

Bearish sentiment weighing on the price

The market sentiment is so bad regarding Cineworld’s prospects that its price-to-earnings (P/E) valuation is negative. For the latest 12 months, the P/E ratio for Cineworld is -0.5 times. This suggests that the company earns more per share than the market is willing to pay right now. I think that’s quite an indictment, and the share price is bearing the brunt.

I’m bearish on the shares too, for two reasons, the first of which is fundamental. The main challenge to Cineworld’s future growth prospects is its current and sizeable credit obligations. The lion’s share of its limited resources is being used to pay down debt, kicking any capital expenditure plans into the long grass. Interest rates in the UK and US are only going to increase from here. This will add to the group’s cost of capital, compounding an already insurmountable debt pile.

The second reason is structural. Smartphones, DIY digital technology, and social media mean ‘Hollywood’ isn’t quite as dreamy, or distant, as it once was. And streaming giants have provided us with alternatives to going to the cinema.

Both of these developments will continue to weigh on the share price of Cineworld over the long term.

Reasons for optimism

I previously said that it would take a very patient investor to buy Cineworld shares, despite the falling share price. And I still believe that.

However, there are some reasons to be positive. Just recently the shares rose as Tom Cruise’s rebooted Top Gun smashed blockbuster opening weekend records. It made the film the highest-opening non-superhero movie released since the start of the pandemic. Maybe cinema might not be dead after all?

In addition, the company has been reopening cinemas across the country and said it continues to see “a recovery across our business,” according to the latest annual report.

Meanwhile, the average price target from analysts covering the Cineworld stock is 40p by the end of 2022. This would be quite a lift from the current price.

Why I’m still avoiding the shares

The next time I discuss the Cineworld share price, it may have dipped further. But it still won’t be an opportunity for me to buy. Despite its recovering revenue, the business is heavily leveraged, and this will eat into investor returns over the long run.

For the shares to become attractive to me, its debt burden will need to be reduced significantly. To be frank, the only way I see Cineworld stock becoming attractive, is if it goes into single-digit penny stock territory. Until then, I’ll continue to avoid it.

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 considered so you should consider taking independent financial advice.

Henry Adefope 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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