The Cineworld (LSE: CINE) share price has been one of the pandemic’s biggest losers. Since the end of 2020, the stock has fallen around 70%. However, as the shares have recovered from their Covid-related lows, they’ve added 55% in the past 12 months.
Still, even after this performance, the share price looks cheap compared to the level it was trading at in 2019. At that time, shares in the cinema group reached a high of 320p.
Indeed, two years ago, the company was on top of the world. It had grown to become the second-largest cinema operator worldwide, and management was in discussions to bulk up the business further.
The company completed its acquisition of US chain Regal Cinemas for $3.6bn in 2018. Almost a year later, it announced the acquisition of Cineplex Entertainment, Canada’s largest cinema chain, for approximately $2.1bn. However, the Cineplex deal fell apart when the pandemic struck.
Cineworld share price problems
These deals transformed Cineworld, but they also lumped it with a tremendous amount of debt. At the end of last year, the group’s debt mountain totalled $8.3bn, or £6.1bn. By comparison, the organisation’s current market value is just £900m. The company has since added yet more debt.
With so much debt and an uncertain recovery ahead of it, I think it’s unrealistic even to suggest that the Cineworld share price could return to its year-end 2019 level of 200p. However, I think the chances of the stock returning to 100p are much higher.
For the 2019 financial year, the company reported a net income of $180m on revenues of $4.4bn. It might take some time to return to this level. But if Cineworld’s sales recover to 2019 levels, the group could earn more than $100m in profits. I say $100m because as the firm’s debt pile has expanded over the past year, so have its interest costs. These will likely have an impact on profit growth as we advance.
With $100m of income (around £75m a year), the Cineworld share price is selling at an earnings multiple of around 12 today. The market average P/E is approximately 15, suggesting the stock would be cheap compared to the rest of the market if it hits this target.
City analysts are much less optimistic. Analysts forecast $28m (£20m) of profit on revenues of $3.9bn in 2022. That would put the stock on a P/E of 25 at current levels, which seems expensive.
Difficult to value
These different estimates show just how difficult it is to value the Cineworld share price. The company is facing an incredibly uncertain future. There’s no guarantee consumers will ever return to its theatres in large numbers. There’s also no guarantee the business will ever be able to pay off its borrowings.
So, overall, while I think the stock could return to 100p at some point, I wouldn’t buy the stock today. I think it’s just too difficult to predict what the future holds for the business.
Rupert Hargreaves 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.