Shares in cinema operator Cineworld (LSE: CINE) – which were hammered during Covid – have shown signs of a recovery lately. While the share price is down around 70% over a 12-month horizon, it has jumped more than 10% since late May.
Given this small rebound, I’m wondering if I should buy Cineworld shares for my portfolio as a turnaround/reopening play. Let’s take a look.
Cineworld shares could keep rising
In the near term, I wouldn’t be surprised to see the Cineworld share price climb higher.
The reason I say this is that the outlook for cinema operators is generally improving. Admissions are rising after Covid-19 and there are some big movies that could boost box office takings.
Top Gun: Maverick is one example. In its opening weekend, it grossed $248m worldwide. Other movies in the pipeline this year include Avatar 2, Jurassic World: Dominion, and Thor: Love and Thunder.
“Clearly we have reason for optimism,” said Cineworld CEO Mooky Greidinger in an interview recently.
Meanwhile, if we look ahead to next year, the stock’s valuation seems quite low. For 2023, analysts expect the group to generate earnings per share of 8.2 cents. At the current share price and exchange rate, that equates to a forward-looking price-to-earnings (P/E) ratio of just four. That’s a very low multiple.
Two risks that could hurt the share price
However, at the same time, I also wouldn’t be surprised if the share price was to fall from current levels.
One major issue here is the company’s debt pile. At the end of the 2021, net debt stood at $8.9bn. This is a problem in today’s rising-interest-rate environment. It’s worth noting that Refinitiv data shows that Cineworld’s credit score is just one (out of 100). This indicates that there’s a high probability that the company will default on its debt in the next year.
Another big issue here is litigation. Last year, the group said that it would pay out $170m to Regal shareholders, who were disgruntled with the amount they received when Cineworld took over Regal in 2017. The company is also involved in a dispute with Canada’s Cineplex, which could result in damages of up to CAD$1.2bn. This certainly adds some uncertainty.
One group of investors that clearly sees downside risk here is the short sellers. According to my data provider, 159m Cineworld shares are on loan at present. That represents about 18% of the free float, which is a very high level of short interest. I don’t like to bet against the short sellers, because they’re some of the smartest minds in the business.
Conclusion
Given the risks here, and the high level of short interest, I think the best move is to leave Cineworld shares on my watchlist for now.
In my view, there are safer stocks for me to buy at the moment.