Cineworld (LSE: CINE) shares took a huge hit this week. As I write this (on Friday evening), the Cineworld share price is sitting at 4.1p, down from 21p at the start of the week.
So, what’s going on here? And has the massive share price fall presented me with a buying opportunity?
Why Cineworld shares tanked this week
There are a couple of reasons Cineworld shares tanked this week.
Firstly, the company posted a rather worrying business update on Wednesday.
In the update, it advised that recent admission levels had been below expectations. It blamed this on a limited film slate and said that it expects the lack of blockbuster films to continue until November. This is likely to negatively impact trading and the company’s liquidity position.
Additionally, Cineworld said that, as a result of the poor performance, it has been taking steps to obtain additional liquidity and restructure its balance sheet to deleverage itself (it has a mountain of debt on its balance sheet).
Worryingly, it said that: “Any deleveraging transaction will likely result in very significant dilution of existing equity interests in Cineworld.” This suggested that it was considering a debt-for-equity swap.
Secondly, an article in the Wall Street Journal posted on Friday said that the company is preparing to file for bankruptcy. The report said that the cinema operator has engaged lawyers from Kirkland & Ellis LLP and consultants from AlixPartners to advise on the bankruptcy process.
Clear warning signs
I can’t say I was particularly surprised by either of these developments.
When I last covered Cineworld shares in June, I noted that net debt at the end of the last year was a massive $8.9bn. This was always going to be problematic for the company, especially in a rising-interest-rate environment.
I also noted that short sellers were targeting the stock aggressively, betting that its share price would fall. Short sellers are some of the smartest minds in the business. So, it’s generally not smart to bet against them.
In hindsight, there were several clear red flags here.
Are Cineworld shares worth buying now?
So, what now? Are Cineworld shares worth buying for my portfolio as a speculative investment? Or should I steer clear?
Well, given the large amount of debt the company is carrying on its books, I’ll be steering clear. At this stage, it’s still too early to know for sure what’s going to happen here. However, the next few months could potentially be brutal for shareholders.
“I would argue the equity is likely to be worthless as things stand now,” wrote UK equity analyst Paul Scott earlier this week.
It’s worth noting that short interest here is still high. According to my data provider, 146m Cineworld shares are on loan at present. That represents about 16% of the free float. This indicates that sophisticated investors see further share price weakness ahead.
Given the high level of uncertainty here, I’m not tempted to buy the stock. To my mind, there are much better (and very much safer) stocks I could buy today.