Cineworld (LSE: CINE) shares spiked as high as 9p at the start of November, on the back of bankruptcy progress news. The company, which is negotiating Chapter 11 proceedings in the US, came to an agreement with landlords to pay some rent. It should free up some cash too.
Since then, though, the Cineworld share price has fallen back. It’s still around twice the level it was at before the recent announcement. So investors who took a risk and bought earlier in the year could have pocketed a very nice profit.
But does it signal the start of something more substantial and sustainable? That’s the big question I face when I think about buying Cineworld shares today.
Finances
The financial situation is pretty dire. But Cineworld has a substantial asset base in its worldwide cinema chains. And I remain convinced that there’s a long-term future. I just don’t know when the business might turn around. And I also don’t know who will own it when that happens.
The big problem is that there’s little in the way of quantitative guidance. There are really no reliable forecasts out there, and pretty much nothing in the way of fundamental valuation metrics to be seen. And without those, it can be very hard to value shares.
Industry fortunes
Cineworld’s third quarter was disappointing. But rival AMC Entertainment has posted results that suggest the wider cinema industry could be on the way back. AMC, the world’s biggest cinema operator, reported a 27% increase in revenue in its latest quarter. That was ahead of analyst expectations.
After the recent jump for Cineworld shares, I suspect investors were hoping for further news in the following days. We haven’t had any, and I presume that’s behind the subsequent share price weakness.
Recovery situations are often like this, especially for loss-making companies. Investors await updates, and many will buy when something emerges. Then the shares drift downwards again until the company says something else.
Fundamentals
That kind of approach strikes me as watching the share price rather than examining the company, and chasing headlines rather than keeping an eye on the fundamentals. And I really don’t see that the latest bankruptcy process developments have changed anything significant.
We’re still looking at huge net debt, which stood at $8.8bn at the end of June. And cash flow is still negative, making the balance sheet progressively worse.
Cineworld has a market cap of £68m. So if I had £68m to invest today, would I consider buying it out? Not a chance. I’d be buying an $8.8bn debt, with a cinema chain thrown in. And I’d expect to have to sell the cinema chain to try to pay off the debt.
Verdict
I do think I see a viable future here. And I reckon the death of the cinema industry has been greatly exaggerated. But the financial uncertainty means I wouldn’t want to own the whole of Cineworld.
And that means I really shouldn’t buy any of it.
