On Monday 5 October, Cineworld (LSE: CINE) announced that it would temporarily be shutting its 536 Regal theatres in America and its 127 British outlets. This led to a single-day 30% drop and the share price has been volatile ever since. This means that the cinema has now lost over 80% of its value since the start of the year and for many value investors, the company may now seem too cheap to ignore. But with problems abounding, are Cineworld shares too much of a risk?
What has caused the share price decline?
The cinema chain has faced a torrid time over the past few months. Firstly, in March, governments around the world forced cinemas to close. This saw the firm take a massive hit to revenues, and a first-half operating loss of around £1.3bn.
But since cinemas have been allowed to reopen, things have not been much better. Not only is this due to the unwillingness of many to visit cinemas, but also the few films being released. This culminated in the decision by MGM and Universal Pictures to delay No Time to Die, the latest James Bond movie. As such, the firm has now taken the decision to shut its cinemas indefinitely. This is the fundamental reason for the most recent decline in the Cineworld share price.
Unfortunately for the company, the problems extend far beyond this recent closure. In fact, in order to grow, it made a number of debt-fuelled acquisitions over the past few years. This means it now has £6.1bn in debt, compared to shareholders’ equity of just £1.2bn. While this wasn’t such a problem when the company was making a profit, its current unprofitable status does shine a light on this issue. As such, fears the company won’t survive the crisis has placed a major strain on the Cineworld share price. It has also made the firm a target for short sellers.
Even if Cineworld can manage to come out of the crisis, there’s sure to be significant damage. In fact, it’s likely that it will have to renegotiate its debts with creditors and selling assets would be one of the expected results. Consequently, I cannot see Cineworld returning to its former glory, and shareholders should expect a significantly smaller company in the future.
Would I buy Cineworld shares?
Although the future does definitely look uncertain, this is certainly reflected in the Cineworld share price. For example, the business has a market cap of only £400m. For a market leader, this is extremely low.
But unfortunately, I believe that the whole cinema industry is in decline. This started with the increasing popularity of streaming services and has been exacerbated by the pandemic. This therefore makes Cineworld shares too much of a risk for me. Instead, there are many other cheap opportunities on the market, all of which I think have better chances of survival.
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Stuart Blair 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.