Cineworld (LSE:CINE) was struggling before coronavirus came along and exposed the extent of its liabilities. It had taken an ambitious swing at buying up cinema chains to become the biggest and the best in the business. Sometimes ambition pays off, (the risk versus reward mantra is never far from an investor’s mind), but sometimes you can get too big for your boots and the cards of fate fall the other way. Unfortunately, the Cineworld share price reflects the latter.
Massive share price tumble
The Cineworld share price has fallen 84% year-to-date. It has an eerily low price-to-earnings ratio of 3, and earnings per share are under 10p. These financial metrics reflect a company struggling to stay afloat, and unfortunately that is exactly the position Cineworld finds itself in.
UK cinemas began reopening in July, but consumers are still reluctant to return. The months of screen time at home have perhaps taken the shine off paying to watch yet another screen, even if it is in a different location. Worries about hygiene, mask wearing and proximity to strangers are also off-putting.
Streaming services have undoubtedly become commonplace in recent years, and never more so since lockdown. Several of them are now opting to release straight to the small screen, foregoing the traditional cinema route, while other new releases have been postponed or cancelled completely. Disney opted to release its live-action version of Mulan straight to its streaming service Disney+ much to the dismay of British Cinema regulators.
Disney+ has in fact benefited from the pandemic, illustrating the stark difference between the corporate winners and losers of the unfortunate situation. Its timely launch in the UK, a day after lockdown began, led to many more subscribers than expected.
Cineworld’s acquisition anguish
Cineworld’s acquisition of Regal Entertainment two years ago set it up to be the second-largest cinema chain on the planet. It then set its sights on Cineplex, which excited shareholders and could have set up the Cineworld share price for a big boost as it would have brought it into first place as the world’s biggest cinema chain. Unfortunately, the pandemic panic snatched this dream away and Cineworld pulled out of the deal. On one hand, it was unlikely to be able to afford the acquisition, but now it has saddled itself with the threat of a lawsuit, as Cineplex states it had no right to withdraw.
In many ways, I think Cineworld’s ambition should be respected. It was taking a risk in attempting to corner the market. Had it pulled it off, shareholders would have been delighted. Unfortunately, it was not to be.
Cineworld, a £483m company, now has a debt liability approaching $4bn (it reports in dollars), not a figure to be taken lightly. It does have debt and credit facilities in place, but their repayment surely depends on visitors returning to screens as soon as possible.
Cineworld is a heavily shorted stock, meaning there are many financial analysts betting on its demise. I think that very much depends on how quickly people return to cinemas. Full capacity is a long way off, and its share price may well fall further. In the near term I do not think it will go to zero, but if things do not improve, this remains a possibility.
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Kirsteen 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.