Investing in Cineworld (LSE:CINE) at any time in 2020 has been a very costly endeavour. But could buying shares in the cinema giant now be the bargain of the century?
This is a household name. You’ll find Cineworld cinemas in almost every major town and city in the country. So seeing the Cineworld share price bumping around below 25p? It’s likely to activate the ‘screaming bargain’ centres of the average investor’s brain.
After all, doesn’t Warren Buffett suggest we should be greedy when others are fearful?
So this is the question I will answer today: is the Cineworld share price massively undervalued?
Opening crawl
The Cineworld share price has plummeted more than 87% since the end of last year. At Christmas 2019 all seemed to be going rather swimmingly for the mega-chain.
It had a £1.3bn deal in the offing to buy out its Canadian rival Cineplex. This would give the FTSE 250 company a massive new market and 1,670 extra screens across 167 theatres. A year earlier it had created the world’s second-largest cinema chain with a massive £2.4bn buyout of rival Regal cinemas.
Then the pandemic happened. As a business that relies on packing as many people into a space as possible, it could not have come at a worse time. Every single venue closed: 787 cinemas across 10 countries.
An April 2020 decision by Cineworld to stop paying directors’ salaries and suspend future dividends was seen as a prudent financial move. But only because such heavy debts had piled up in the background.
Middle row
The company reported on 24 September 2020 it had swung to a $1.64bn loss in the first half of the year, compared to a $172m profit in the first half of 2019. Its shares slid a further 12% in a day, indicating exhaustion from shareholders with these sharp falls.
The lead analyst for CMC Markets, Michael Hewson, said these shocking numbers “serve to highlight the scale of the mountain that needs to be scaled“, but did at least reinforce the decision to pull out of the Cineplex takeover.
The problem now, of course, is that Cineworld is facing a massive and costly lawsuit for pulling out of that mega-deal. It has countersued, but this could be a fight that lingers for years.
Debtor’s prism
Credit ratings agencies like Fitch, Moody’s, and S&P, who measure how likely a company is to be able to repay its debts, have been scathing.
S&P has downgraded Cineworld to CCC+, its lowest possible rating, while according to Moodys, leverage is up from 5.5 times Cineworld’s annual earnings in 2019 to over 9 times earnings in 2020. These are numbers as investors we do not want to see. These are scary levels of debt.
The only real hope for a turnaround now is a takeover from another cinema chain. But the gargantuan debt pile — which any new owner would have to take on — is likely to keep buyers away.
Cineworld leader?
The Cineworld share price is likely to remain very volatile, swinging back and forth by large percentages every day. And its long-term outlook is worse than poor. It’s bleak.
So I would suggest this share is only really of interest to day traders and short-sellers, who profit most when a company’s share price falls dramatically.
There are better places for your hard-earned cash today. I would avoid.