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Cineworld share price: what I’d do about its 14% increase today

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Cineworld (LSE: CINE) has done it yet again. Despite all concerns to the contrary, the UK-headquartered, multi-national cinema chain has seen a sharp share price rise. As I write, the Cineworld share price is up 14% from yesterday’s close.

Why the CINE share price rose 

The share price has been rising since Monday on news of an incentive plan for its management. Both the CEO, Moshe Greidinger, and Deputy CEO, Israel Greidinger, will receive a stock award if the CINE share prices rises to pre-crisis levels in three years as per a stockholders’ decision. 

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The CINE share price rose to 81p on the news, already bringing it closer to the 190p target set out for the management.

The next obvious question to ask is whether it can reach the targeted share price.

Improving outlook bodes well

I’m inclined to think so, despite all its current challenges. There are four reasons for this:

  1. Vaccines give hope. This is especially so for the likes of CINE, whose business has halted over the past year. 
  2. The last-minute Brexit deal means that the threat of a hard reset for the UK economy has passed. It now has better prospects than those suggested by a no-deal Brexit. Discretionary entertainment spends, like those on cinema, are likely to be less hard hit now as a result. 
  3. Much of Cineworld’s revenues are derived from the US, whose prospects look quite good. The International Monetary Fund has upped its US growth forecast to 5.1%, an impressive increase of 2 percentage points. This means that we can likely expect a comeback in US consumer spending too. Small discretionary spends like cinema tickets are more likely to get the initial boost from this, even if consumers still stall on big luxury expenses. 
  4. Broad stock market trends show increased investor interest in riskier stocks, like CINE and other pandemic hit shares. A continuation of the rally bodes well for the CINE share price, then. It has already more than doubled from the time I wrote about it as a contrarian pick at the rally’s start. If the world inches closer back to the old-normal in the next few months, it may even get another fillip like it did today. 

Risks persist for CINE, too

The downside still persists, though. 

CINE is running up huge bills as well as debt because of the pandemic. While it has funds to keep going for now, what if the pandemic lasts longer than expected?

Coronavirus variants may indeed stretch it out, putting spokes in the wheels of the economic recovery. Moreover, unresolved Brexit-related issues could come back to haunt the UK economy too. Besides this, there’s always the possibility that the real economic damage from the corona-crisis may be much bigger than we anticipate right now. 

The takeaway

Yet, I’m inclined to think more optimistically about the Cineworld share price than not. The upside appears more concrete than the downside, which is more in the realm of possibilities, at least for now. I’ll keep it on my watchlist. 

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Manika Premsingh 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.

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