Trying to make accurate calls on the Cineworld (LSE:CINE) share price over the past 18 months has been very hard. I was bearish on the stock for much of last year as the pandemic forced cinemas to close or have reduced capacity. A few months ago, I thought the share price was becoming oversold as it broke below 100p. With it now trading at 67p, do the potential rewards offset the risks?
The correlation with the virus
So-called Freedom Day a week ago saw the Cineworld share price drop to its lowest level this year, below 60p. The concern was that taking away all restrictions was likely to see an increase in infection rates and self-isolation.
To a certain extent, this has been the case. Self-isolation numbers have increased in what has been dubbed a ‘pingdemic’. However, the actual confirmed cases have been falling. The seven-day moving average is now 26,888, having been above 40,000 on Freedom Day.
The initial concern that has faded has allowed the Cineworld share price to rally to current levels of 67p. This already flags a key point to me. Cineworld investors are clearly sensitive to the impact of any future Covid-19 events. Of course, this does make sense given the nature of business. However, I need to be careful as short-term movements in shares will likely be driven by Covid-19 headlines instead of fundamentals from Cineworld.
So when thinking about the risk/reward situation, it really depends on my outlook for the virus. I was very positive a month or so ago, but am starting to cool down my outlook. I do feel that for the second half of this year we could continue to require plenty of caution. As a result, I see long-term rewards from buying Cineworld shares now, but a risk of further downside in the coming months.
Cineworld shares suffering from poor finances
Aside from the virus, the other factor I need to consider when weighing up the risk and reward is the financial health of Cineworld. Interim results are due out in early August, so this will give me a lot more clarity. The latest information I have is the full-year results that were released back in spring.
Total liabilities were reported at over $10bn, with a loss before tax of just over $3bn. The loss is a drain on cash flow, but increased borrowings can help to provide some help in that regard.
I think the reward is there if Cineworld has a clear strategy on how it will reduce debt and liabilities can come down to a sustainable level in coming years. However, the message could be that more borrowing is needed. If so, I think the risk of buying shares even at 67p is too high. It can be very easy to get into a spiral of refinancing and adding debt.
Overall, the Cineworld share price does carry a high risk with it at the moment. If I have a positive outlook on virus containment and am bullish on management having a strategy for debt, I think the reward stacks up. Personally, I don’t have a high conviction on either right now, so won’t be investing in the short term.
