If I’d written about Cineworld (LSE: CINE) shares at the start of 2018, it would have been a very different story from today. The firm had just acquired Regal Entertainment Group for £2.5bn, making it the second largest cinema chain in the world. Large releases such as Black Panther and the latest Avengers outing were also imminent. Fast-forward three years and the picture is very different. Cinemas are shut, the release date of big films has been delayed over and over again and the company is fighting for survival. But the different fortunes of the company are also reflected in the Cineworld share price, which has fallen 75% over the past three years. With vaccines offering some hope for the company, however, is there a chance that it can recover?
Problems facing the business
The main problem facing the company is its current inability to make a profit — a big problem, I have to admit! First-half losses last year totalled over $1.6bn, and there are no indications of any improvement since. This is especially true after the most recent lockdowns in the UK.
The sparsity of films being released is also a big problem. For example, the new James Bond has already been delayed twice, and reports state that it may be delayed again until November. When cinemas are able to reopen, there may therefore still be a lack of customers. The continued rise of streaming sites, like Netflix and Disney+, may exacerbate this problem. It’s therefore not a surprise that the Cineworld share price has slumped this past year.
The debt problem
Another significant worry for shareholders at the moment is debt. Whereas some may have praised the company for its debt-fuelled acquisition of Regal in 2018, this looks significantly less shrewd now. In fact, in part due to this acquisition, the cinema chain now has net debt of over $8bn. This is compared to shareholder equity of just $1.3bn. This is clearly a major problem for a company not making a profit right now and has been a major strain on the Cineworld share price.
But the news isn’t all negative. In November last year, the firm was able to issue $450m in debt to help its chances of survival. This debt will also not be called in until 2024. While it adds to the company’s massive debt pile, the Cineworld share price has still been boosted by the news for two reasons. Firstly, it should help the company survive for the short-term future. Secondly, it shows that some creditors have faith that the company will survive, and their loans will be repaid.
Would I buy Cineworld shares?
At 65p, Cineworld shares are heavily discounted, but I don’t think they’re cheap. They have already risen around 150% since their lows in October, and despite the vaccines, the cinema industry doesn’t look set to thrive after the pandemic. I’m optimistic that Cineworld will survive, but it will come out battered and bruised. This is therefore a stock that I’m not touching and will look elsewhere for bargains.
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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Netflix and Walt Disney. 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.