The Cineworld (LSE: CINE) share price looks cheap compared to its trading history after recent declines. And with that being the case, the stock looks interesting to me as I’m a value investor at heart.
However, I’m worried about the company’s prospects. It seems to me as if the odds are stacked against the business and its plans for recovery in the near term.
Cineworld share price headwinds
The way I see it, three major headwinds are holding back the stock at present. The biggest of this is the fact that most of the firm’s locations are now closed. This is preventing the group from generating revenue.
Second, debt. Cineworld has a lot of it. It will be hard for it to make a dent in its borrowings at reduced levels of capacity, and impossible if the screens are not allowed to open.
Third, customers. Any business needs customers to be profitable. Cineworld faces a huge problem here. Aside from the fact that the group’s cinemas are closed, the firm is operating in a rapidly shifting media environment. Streaming is taking over. Consumers no longer need to visit the cinema to see the latest film. Streaming services can provide this service at a fraction of the cost.
To some extent, the Cineworld share price is tied to new film releases. A good release can make or break the firm’s year. In recent years, it has benefited from a slate of blockbuster films, but there’s no guarantee this will continue. Indeed, several films have gone straight to streaming this year.
I think this shows how little power the company really has, and that’s a concern. In some respects, it suggests the firm is not in control of its own future.
When evaluating stocks for my portfolio, I like to buy companies with strong competitive advantages and robust balance sheets. Cineworld has neither of these.
As such, I’m wary about buying the shares. Yes, the stock looks cheap compared to its trading history. However, from a fundamental perspective, it isn’t easy to see where the company goes from here.
Even if a coronavirus vaccine is rolled out in the next few months, there is no guarantee consumers will return to the group’s screens quickly. What’s more, there’s no guarantee production studios will supply the business with films to show. This makes it very difficult for me to figure out if the company has any future, and if it is worth buying at current levels.
Therefore, I may avoid the business for the time being in favour of other opportunities. I think it may be more sensible to wait and see how the next few months pan out before taking a position. Even though a vaccine rollout is on the horizon, this does not guarantee that the Cineworld share price will recover lost ground in the near term.
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.