The Cineworld (LSE: CINE) share price fell to a four-month low on Wednesday despite the company announcing it was to reopen its cinemas in the US next month.
With screens about to reopen could this be a good time to buy a bargain, or does the Cineworld share price still come with too much risk?
The Cineworld share price has been on a rollercoaster
The firm has endured a dreadful time since peaking at 320p in May 2019. Initially there were concerns over its debt level. It acquired Regal in 2018 to become the world’s second-largest cinema chain.
But the coronavirus pandemic was crippling to the Cineworld share price. With all its 9,500 screens closed, the firm has been burning through cash. It is currently getting through $45m a month in costs, having reduced this considerably from over $100m. This is obviously awful news for a company already laden in debt.
The Cineworld share price fell all the way to 18p in March, before recovering to 100p in June. At the time of writing, it sits at just under 40p. That is quite some ride for its investors. Ultimately though, shareholders who bought in May 2019 could be nursing an 85% loss.
Are the end credits rolling?
The price-to-earnings (P/E) ratio here is just 2.6. Far from looking at a bargain, I worry when a P/E ratio falls this low. And it seems others agree with me.
According to a short tracking website, Cineworld is the fifth most shorted stock in the UK. 8.3% of its shares are loaned out by short sellers. Two new positions were added in the last week.
These are professional traders who are betting that the Cineworld share price will fall. While they have been wrong in the past, I am certainly cautious when more than 5% of a company’s shares are being shorted.
The firm has said its focus when reopening will be ‘safety first’. But this means extra sanitary costs (like protective screens, hand sanitisers), mask requirements, and reduced capacity limits. Fewer customers due to social distancing will mean no quick return to pre-Covid revenue levels.
Earlier this week Disney and Paramount announced they were pushing back major releases. These included sequels to Top Gun, A Quiet Place, Star Wars, and Avatar into 2021, while Mulan was delayed indefinitely.
During the lockdown, Cineworld pulled out of its $2.8bn acquisition of Cineplex, which would have seen it become even more indebted. However, as my Foolish colleague recently reported, even this could become a headache for the company as Cineplex is taking Cineworld to court.
Will there be a happy ending?
With agreed debt and credit facilities in place, I do not think the company will go bankrupt anytime soon. But I’m not convinced the customers will flood back either. A lot of people spent a considerable amount of time during lockdown watching Netflix. I for one, do not love the idea of watching a film in a mask in an enclosed space with so many others.
Combine the above with debt that is approaching $4bn and a longer-term future challenged by streaming services, and I still see a lot of downside to the Cineworld share price. A share only for the brave, in my opinion.
David Barnes has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. 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.