The Cineworld (LSE:CINE) share price has been falling off a cliff recently. Since the start of July, the stock is down by over 30%. And looking back further to its peak in March, it has since fallen by more than 50%. While Cineworld’s 12-month performance is basically flat, it seems the grand pandemic recovery for the Cineworld share price is failing. So, what’s going on? And is this recent drop an opportunity to buy some shares for my portfolio at a significant discount?
The collapsing Cineworld share price
In my experience, a sudden mass sell-off is usually triggered by a new piece of negative information coming to light about a business. But in the case of Cineworld, it’s an old piece of data seemingly causing all the trouble. Despite publishing an encouraging trading update in May that indicated vital signs of a recovery, investor uncertainty is rising.
While there are undoubtedly multiple contributing factors, the main one appears to be the state of its balance sheet. To remain afloat this past year or so, the management team was forced to grow its already substantial debt pile. And now it seems the foundations of the business are beginning to crack.
This is something I’ve highlighted on multiple occasions back in March when the Cineworld share price was soaring. Even if the business can return to its pre-pandemic profitability levels, around 75% of its underlying income will evaporate simply to cover interest fees on its loans. Needless to say, that leaves very little income left to pay down its now $8.6bn pile of loans.
Knowing that I can see why investors are beginning to panic. And why institutions have begun reopening short positions against the business.
Is there a chance for a comeback?
There is no denying the solvency and liquidity of this business is highly strained. But I think a turnaround is possible. The reopening of cinemas and the sudden rush of customers from pent-up demand certainly helps relieve some pressure. What’s more, with a solid and diverse line-up of delayed blockbuster titles coming out in the next few months, Cineworld should be more than capable of filling its seats as well as raising its share price.
This may not be sufficient. But the management team does have some disposable assets on the books. In other words, any under-performing locations could be sold off. And if provided with a pathway to recovery, issuing new shares may also be a viable method of raising capital to help bring its debt levels to more manageable levels.
The bottom line
While a long-term recovery for this business may be possible, I’m personally not tempted to add any shares to my portfolio. This recent drop may be an opportunity to invest at a low cost. But until the management team can unveil a plan to reinforce its currently crumbling balance sheet, I’ll be keeping Cineworld on my watch list.
