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Could now be the time to buy Cineworld shares?

When governments across Europe started to impose economic lockdowns to try to contain the spread of the coronavirus in March, shares in Cineworld (LSE: CINE), one of the largest cinema operators in Europe, dropped by nearly 80%. However, the shares have recently started to recover as lockdown restrictions have eased.

This trend could continue over the coming weeks and months.

Cineworld shares on the up

Its shares have risen nearly 300% from their March lows over the past few weeks. The company has been working hard to secure its future since lockdowns were imposed. These efforts have helped improve investor sentiment. 

Management has reached an agreement with lenders to give the group more breathing space on its borrowing commitments. It has also made the most of the available government financing schemes.

The group has picked up $45m through the CLBILS loan scheme in the UK and $45m from the US Cares Act. Bankers have also given the green light to a $110m extension of the company’s overdraft. Another funding facility worth $250m has been secured in the past few days.

On top of these new funds, the firm had $500m in liquidity available at the end of 2019. This funding should be enough to see the company through the worst of the crisis.

Cineworld has also pulled out of a $2.3bn deal to buy the Canadian cinema company Cineplex. Considering the uncertainty facing the industry, this appears to be the right course of action.

All of the above suggests that Cineworld shares are well supported by the company’s balance sheet. And as the group begins to re-open across Europe, its earnings should start to recover as well.

Growing bottom line

Unfortunately, while the company’s balance sheet does appear to be robust, the shares are facing a great deal of short term uncertainty.

Cinema capacity is unlikely to return to pre-crisis levels any time soon as enforced social distancing in enclosed areas may last for some time. This means it is difficult to predict the company’s near-term earnings potential.

Still, the company will have cash coming in, and that will help support the Cineworld share price. As such, with shares in the business down by around 60% since the beginning of the year, now may be a good time to buy into the group’s recovery.

Even though the uncertainty facing the industry is going to last for some time, City analysts believe Cineworld shares could be worth as much as 140p based on its near-term earnings potential.

That suggests an upside of approximately 90% from current levels.

Of course, this return is not guaranteed, and a second wave of coronavirus could be a devastating development for Cineworld shares. Therefore, it may be best to own the investment as part of a well-diversified portfolio. Doing so will enable investors to profit from any upside while minimising downside risk if the worst should happen.

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Rupert Hargreaves 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.