The Cineworld (LSE: CINE) share price has crumbled a staggering 74% this year. Following the decline, the stock is now dealing at one of its lowest levels in recent history. This has attracted value-hunting investors.
However, while the Cineworld share price looks cheap right now, the company is facing serious headwinds. These could hold back the group’s near-term recovery.
Cineworld share price: on offer
There’s no denying the Cineworld share price looks cheap from both a price and fundamental perspective. Based on current City projections, the group is set to report a net profit of $207m in 2021. If the company hits this target, the stock is currently dealing at a forward price-to-earnings (P/E) multiple of just 3.7.
Historically, Cineworld shares have changed hands for a P/E of around 13. These numbers suggest the stock could jump 250% in the best-case scenario.
Unfortunately, a lot has to go right for the Cineworld share price to hit this lofty target. The world’s second-largest cinema chain will need to re-open all of its theatres and convince customers to return. Whether or not it can do this depends entirely on the course coronavirus takes over the next few months.
If countries continue to bring the pandemic under control, then theatres may be able to re-open. If not, or if there’s a second wave of coronavirus, then corporations like Cineworld face even more uncertainty. The company has already had to delay the re-opening of its theatres in the US due to the resurgence of cases in the country.
In regions where the group has already been able to open, primarily across Europe, customers seem to have been slow to return. The number of customers in venues across Europe is still less than 50% below pre-pandemic levels in most markets. In some European markets, it’s below 80%.
All of the above implies the outlook for the Cineworld share price is highly uncertain at the current time. The company needs customers to return to its theatres when they re-open. It could take some time for consumer confidence to return to pre-pandemic levels.
Still, the company has managed to negotiate plenty of breathing space with its lenders. This has given Cineworld time to turn things around. However, if the pandemic lasts into the middle of next year, it could run into some serious financial problems.
As such, while Cineworld share price looks cheap, it may be best for investors to limit their exposure to this business. At this point, it’s difficult to tell if the company will survive for the next 24 months. On the other hand, if profits return to 2019 levels, the stock could double, or triple, in the near term.
Therefore, having limited exposure to the firm as part of a diversified portfolio may be the best option for investors. This approach would allow shareholders to profit from any upside while minimising the downside risk if the company collapses or fails to meet City profit expectations.
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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.