The Motley Fool

Tempted by the Cineworld share price? Here’s what you need to know

Image source: Getty Images.

Cineworld (LSE: CINE) is one of many stocks currently trading at mind-boggling discounts to their previous highs. Over 80% in Cineworld’s case! Could it be one of the biggest bargains of the stock market crash? If you’re tempted by the Cineworld share price, here’s what I think you need to know.

Cineworld’s share price is standout cheap

As a result of shuttered cinemas during the coronavirus lockdown, 2020 is going to be a washout for Cineworld. Indeed, City analysts expect the company to make a hefty loss. Meanwhile, the board announced a suspension of dividends for the year as long ago as April.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

However, looking ahead to 2021, analysts have pencilled in an earnings-per-share (EPS) recovery to around 17 cents (13p at current exchange rates) and a dividend of around 8 cents (6.1p). The Cineworld share price is currently around 53p. Therefore, the forward price-to-earnings (P/E) ratio is just 4.1, and the prospective dividend yield is 11.5%.

If you think that’s standout cheap, the valuation looks even more extraordinary calculated on Cineworld’s pre-pandemic peak EPS and dividend. On this basis, the P/E is 2.7 and the dividend yield is 22.3%. Wow!

Is the Cineworld share price too good to be true?

They say if something looks too good to be true, it probably is. With this in mind, even though the Cineworld share price is at a huge discount to its previous high, investors need to consider whether there are still substantial downside risks.

Several things give me cause for concern. First, it’s worth noting that the Cineworld share price had fallen around 40% from its high — even before the pandemic-inspired stock market crash.

Writing on the company last September, I expressed my scepticism about the advisability of its move into the US market via the previous year’s $3.6bn reverse takeover of Regal Entertainment. My concerns included the structural decline in North America cinema attendance, and Regal’s underperformance versus peers.

Subsequently, I was unimpressed by Cineworld’s proposed debt-funded $2.1bn acquisition of Canada’s largest operator, Cineplex. Cineworld’s debt was already at an elevated level of 3.3 times EBITDA.

My concerns were further compounded by a report from research house Bucephalus. It suggested Cineworld’s accounting was extremely creative and that, on a true view, its debt was more like 9 times EBITDA.

Finally, through the second half of last year, hedge funds were increasingly betting against the Cineworld share price. Short positions rose to such an extent that it became London’s most heavily shorted stock.

Debt can be deadly

The pandemic has dealt Cineworld a severe, and potentially, even lethal blow. Despite backing out of the Cineplex acquisition (the two companies are now locked in a legal battle over damages), Cineworld’s debt is looking more onerous than ever.

It’s been seeking additional borrowing wherever it can find it. US and UK government emergency loans, a $110m increase in its revolving credit facility, and a new $250m secured debt facility. I dread to think what the annual cost of servicing its debt is now. It was running at $568m last year.

It really looks to me like Cineworld will sooner or later have to do a debt restructuring. If so, I think it’s highly likely existing shareholders will be significantly diluted in a debt-for-equity swap. As such, I’m happy to continue avoiding the stock for the time being.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

G A Chester 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.