Could now be the time to buy Cineworld shares?

Cineworld shares have been under pressure recently, but as the company starts to open up again, the stock could take off says this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

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.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »