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Is the Cineworld share price severely undervalued?

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An illuminated Cineworld sign
Image source: DCM

Like many other leisure companies, Cineworld (LSE: CINE) has had an extremely difficult 18 months. Indeed, the chain has fallen to huge losses, while the already-large debt pile has continued to climb. This has strained the Cineworld share price, which is currently priced at 63p. Although higher than its October lows of under 30p, it is still significantly lower than its recent post-pandemic highs of over 120p. As such, is the current Cineworld share price undervalued or are the risks too large?

Trading update

Since its 2020 full-year trading update, the Cineworld share price has been on a downward trajectory. This is not overly surprising when looking at the results. Indeed, the company saw an operating loss of over $2.2bn, and revenues were also 80% lower than 2019.

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Following the trading update, one of my main concerns is the company’s large amount of debt. To survive, the chain has been forced to issue significant amounts of debt. This means that net debt has risen from an already high $7.1bn to over $8.3bn. This gives Cineworld an extremely high debt-to-equity ratio of around 2,000%. For a company unable to make a profit, this is clearly a worry, and leads to fears that it will not be able to survive.

The poor trading update has certainly been reflected in the Cineworld share price, which has fallen around 40% since.

Other issues facing the company

It is not only the trading update that has caused the decline in the Cineworld share price. For instance, there is the competition from streaming services, such as Netflix and Disney Plus. These have seen a surge in demand since the pandemic hit and may therefore limit the number of people going back to cinemas. The high number of coronavirus cases at the moment is also likely to strain demand.  

The lack of current blockbuster films is another reason that may hinder Cineworld’s recovery. This has been particularly bad due to delays to both Mission Impossible 7 and the new James Bond. Nonetheless, the Bond movie is finally expected to arrive in September and a host of highly anticipated films are also expected in 2022.

As such, I feel that the lack of new films is a short-term problem, which should hopefully start to improve over the next few months.

Furthermore, there have been small signs that customers will return to the cinema. For instance, when Cineworld reopened in May, it stated that attendance numbers were “beyond [its] expectations”. This signals that there may still be sufficient demand for cinemas, even despite the challenges of both the pandemic and streaming services. 

Is the Cineworld share price a bargain?

From a valuation perspective, Cineworld shares are not actually overly cheap. For example, it has a price-to-book ratio of around 7, which is relatively high. In comparison, other pandemic-hit stocks like National Express have a price-to-book ratio of around 1.2. This indicates a much cheaper valuation.

Accordingly, I don’t think that the Cineworld share price is low enough to justify taking on the risks. This does not mean that it will not rise though. In fact, the heavy shorting of Cineworld shares could lead to a ‘short squeeze’, similar to what happened with AMC. This was the reason why Cineworld shares rose 10% on Friday. Even so, this is not enough to tempt me to buy.

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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.

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