It was a day that Cineworld (LSE: CINE) shareholders have long awaited. At the weekend, the cinema chain reopened its doors across the UK. The Cineworld share price response was cautious, up around 10% since the start of the week. But it is still down from March’s peak.
And over the past two years, the Cineworld share price has lost 70%. It had been falling even before Covid-19 arrived, as producers have been moving more to direct-to-video releases.
So how was the reopening? From an update Monday: “Cineworld is pleased to report a strong opening weekend in the UK, led by the success of Peter Rabbit 2: The Runaway. This weekend’s performance went beyond our expectations as customers were eager to return to the movies and enjoy the full movie experience, including the traditional popcorn which led to strong concession income.”
The company added that 97% of its US cinemas are now open, Poland and Israel will be opening within the week, and “the company anticipates that most of its cinemas will be open by the end of the month“. This is all good. But what does it mean for the Cineworld share price?
Back to profits this year?
For me it means wait and see. In 2019, Cineworld recorded a pre-tax profit of $212m. That was wiped out in 2020, with a lurch to a $3bn loss. It’s a one-off, of course. And I do think there’s a pretty good chance of Cineworld getting back to pre-pandemic profit levels before too long. That’s as long as vaccination programmes continue, and we don’t face any resistant new variants. Any sign of new lockdowns could hammer the stock again.
So the outlook is brightening. But the shutdown has left Cineworld with one lasting legacy, and it’s not a good one. I’m talking of debt, which must surely remain hanging over the Cineworld share price for a good few years. The thing is, even if it gets back to 2019 profitability, Cineworld will simply not be worth as much. A company with much bigger debt, other things being equal, just isn’t as valuable as one with less.
Cineworld share price tempting now?
The net debt pile stands as high as $8.3bn now. That’s nearly 40 times 2019’s pre-tax profit figure. And it’s more than six times the company’s market capitalisation. On the upside, Cineworld appears to have a strong enough balance sheet to keep it going. It has also just received a US tax refund of $203m, which alone almost reaches that 2019 profit level. So, I don’t see any real likelihood now of Cineworld running out of cash. The possibility of needing to raise more funding is, I think, greatly reducing. And the chance of the company going bust? Well, I just don’t see that at all.
So does today’s Cineworld share price tempt me? I’d like to think some of my investment money was in an arts industry that I love. But with debt levels like this, it’s not going to be with Cineworld.