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Is the Cineworld share price too cheap to ignore? Here’s what I think

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The Cineworld (LSE:CINE) share price has taken a battering over the last 12 months. The cinema chain’s woes have deepened further and further since the market crashed back in March. Is CINE’s current share price too cheap to avoid and can it be considered a contrarian buy? For my own portfolio, I think not. 

Earlier this morning Pfizer reported its Covid-19 vaccine was showing 90% effectiveness. This prompted the market to react and an upturn in activity occurred. The FTSE 100 is up 5% today as I write this. I think this short burst of upward activity will be short lived as Pfizer’s results are reportedly not peer reviewed and there is still a lot more work to be done.

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Cineworld a sinking ship?

The Cineworld share price jumped 60% today from 28p per share up to 45p. As I write, the shares are trading at 38p per share. In the year to date, CINE has lost over 80% of its share price value. It is currently trading at one of its lowest ever levels recorded.

Prior to the economic downturn due to the Covid-19 pandemic, I would have advocated buying Cineworld shares. Between 2015 to 2019, revenue and operating profit were up year on year. If projected financials for 2020 were similar to that of 2019 I would probably rate Cineworld as one of the best bargains out there.

2020 has been a year to forget for Cineworld. I believe it may never recover properly. Due to the Covid-19 pandemic, CINE has borrowed heavily from investors just to keep the lights on. In September it raised $250m from private investors which came with a mammoth interest rate of 11%. If you crunch the numbers, that equates to over $27.5m in interest payments a year. This is nearly 15% of 2019’s profit and, based on current market conditions this could be crippling. The numbers suggest to me that Cineworld may not return to former glory any time soon…

My verdict

Entertainment venues have suffered hugely due to lockdowns and restrictions. Cinemas have been at the forefront of the biggest losers due to the pandemic. At its current cheap price, it could be considered a contrarian buy that will recover. I have a two real concerns with this particular theory when it comes to Cineworld.

Firstly, CINE’s debt level is arguably getting out of control. Assuming no further revolving credit facilities (RCF) are extended, Fitch Ratings predict Cineworld could run out of cash before the end of this year. If it does borrow more money, I believe this will hinder any potential recovery and profitability may not return for years to come. Secondly, I do not foresee pent up demand helping Cineworld. Especially not with the plethora of streaming options available to consumers too and consumer’s general nervousness of going back to cinemas due to Covid-19.

Like my Foolish colleague Stuart Blair, I won’t be buying Cineworld shares. Instead I will focus my energy and spend my hard-earned money on other stocks.

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Jabran Khan 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.

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