The Motley Fool

What’s going on with the Cineworld share price

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

An illuminated Cineworld sign
Image source: DCM

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.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

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.

The Cineworld share price has its risks

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.

Instead, I'd much rather invest in...

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Zaven Boyrazian 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.