Today was a lively one for Cineworld (LSE: CINE) shares. After closing at 102.8p on Wednesday, the Cineworld share price oscillated wildly. As I write, CINE shares hover around 94.3p, down 8.5p (8.3%) overnight. But this drop masks some major price moves this morning.
The Cineworld share price plummets
This morning, the share price went into freefall. After gapping down at the open, it slumped to a low of 88.24p. That was a collapse of 14.56p, or a seventh (14.2%). However, this proved to be the low for the FTSE 250 stock, as it rebounded by over 6p. What caused this share slide? The answer is that the company released a shocking set of results for 2020.
Cineworld lost a whopping $3bn last year
Cineworld is the world’s second-largest cinema chain, with operations in 10 countries at 767 locations. Around three-quarters (73%) of its revenues come from the US, where most states have ordered cinemas to close. As a result, the share price crashed steeply last year.
If Cineworld’s 2020 results were a film, I suspect that they would be a horror movie. Here’s the headline figure: the embattled cinema chain lost $3bn before tax last year, versus a pre-tax profit of $212m in 2019. CEO Mooky Greidinger said that this was the group’s first yearly loss in its 91-year history. For sure, with cinemas closed around the globe, the business model was in big trouble. Even so, this loss was higher than most analysts predicted, hence the initial steep fall in the Cineworld share price.
With cinemas shut down, yearly revenues collapsed by four-fifths (80%) to just $852m. However, with locked-down consumers eager to get back to normal, Cineworld expects 2021/22 to be a bumper period. That said, the group also warned that box-office attendance would be least 5% below pre-Covid-19 levels until 2024. With bad news like this, it’s no wonder that the share price languishes at 30.55p — almost a quarter (24.5%) — below its 52-week high of 124.85p on 19 March (just six days ago).
Net debt explodes to $8.3bn
In this horror movie, what frightens me most about Cineworld is its colossal debt burden. At present, the cinema chain’s shareholder equity is valued at around £1.3bn ($1.78bn). Today, the firm announced that it will raise another $213m of liquidity through a convertible bond maturing in 2025. This is on top of existing net debt of $8.3bn. That’s right: the company’s debt is almost 4.7 times its outstanding equity. Were interest rates not so incredibly low, this debt mountain might prove crippling or even fatal. Even so, with such massive obligations hanging over the business, I fear for the Cineworld share price.
Would I buy Cineworld at this share price?
So would I buy? My answer is an immediate and resounding no. As a veteran value investor, I aim to buy into companies with predictable revenues, earnings, cash flow and dividends. For me, the Cineworld share price is a high-risk bet on rapid growth of the movie/popcorn industry. Of course, I could well be wrong and the Cineworld movie might turn into a feel-good comedy, one leaving shareholders laughing as the shares soar. That really could happen if a much-talked-about leisure spending boom comes about. Whatever happens, just like a Michael Bay blockbuster, there’s going to plenty of action, adventure and plot twists along the way!