Stock market crash: here’s what I’d do about the Cineworld share price

The Cineworld share price looks cheap after the stock market crash, but the company faces an uphill struggle to return to growth.

| 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.

The Cineworld (LSE: CINE) share price has been a terrible investment this year. Shares in the cinema group crumbled in this year’s stock market crash as the company was forced to close its whole estate. 

The group has finally begun to reopen its cinemas. However, it could be a long time before the business returns to 2019 levels of profitability.

With that being the case, today, I’m going to explain in more detail why I think investors should view the Cineworld share price with caution. 

Cineworld share price concerns

The most significant risk facing Cineworld right now is liquidity. The company has taken multiple actions to shore up its balance sheet over the past few months, but these may not be enough. A second wave of coronavirus or prolonged economic slump could cause the corporation significant financial pain. 

One of the most prominent reasons why companies fail is because they have taken on too much debt. Cineworld’s balance sheet was already weak heading into the crisis. It has only become weaker over the past few months.

This could put the firm in a difficult position. Management has been using debt to acquire other cinema companies around the world in recent years. The organisation has been able to do this thanks to strong cash generation from its theatres. A slate of highly popular film releases has also helped. 

If capacity in the company’s theatres is restricted for a prolonged period to maintain social distancing, this could disrupt group forecasts and hurt the Cineworld share price.

At the same time, production companies are increasingly shifting their focus online.

For example, streaming giant Disney recently skipped over cinema owners by releasing its blockbuster Mulan remake directly onto its streaming service, Disney+. If this trend gains traction, Cineworld could have some serious problems. 

Cloudy outlook

Considering all of the above, even though the Cineworld share price looks cheap after the recent stock market crash, I think investors should adopt a cautious approach towards the business. 

If the company can open all of its cinemas next year, and attendance returns to 2019 levels, the Cineworld share price could double or even triple from current levels.

However, a second wave of coronavirus or prolonged social distancing requirements will prove difficult for the company. It will have to borrow more money, or possibly issue new shares. This would dilute existing shareholders and make it harder for the Cineworld share price to return to previous highs. 

As such, it seems as if this investment is only suitable for the most risk-tolerant investors. The stock could increase significantly from current levels, but it could also fall further.

The best way to benefit from any potential gains while minimising losses could be to hold Cineworld shares as part of a diversified portfolio. If the company’s recovery starts to gain traction, investors can always increase their position. 

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 owns no share 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

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »