There has been no shortage of twists and turns lately in the fortunes of Cineworld (LSE: CINE). Yesterday alone, the Cineworld share price jumped 25%.
Still, even after that dramatic price action, the shares have lost over 90% of their value in the past year. The share price chart is not a pretty sight.
Does yesterday’s jump suggest that the shares could be a bargain for my portfolio, hiding in plain sight?
How to value shares
In short, I do not think so.
A bargain is something that I can buy for less than it is worth. At the moment, Cineworld shares change hands for pennies. But that alone is not enough to make me see them as a bargain. Instead, I need to compare the price to what I think the company is worth.
It is not always easy deciding how to value shares. But one thing we know about Cineworld is that it is sitting under a massive debt pile. It ended last year with $8.9bn in net debt. That matters because if the company needs to use any profits it makes to service debt, it is not able to fund dividends. The Cineworld dividend is still cancelled and I expect that to be the case for the foreseeable future.
But what if the business does not even earn enough money to service its debts? That could force it into bankruptcy. Alternatively, it could negotiate with its creditors to come to an alternative arrangement. For example, it could dilute existing shareholders to issue new equity in exchange for reducing debt. That is exactly what it has been working on lately.
So although it is hard to pin a value on Cineworld shares, I think there is a chance they could end up being worth nothing, or close to it. Restructuring such a large debt could wipe out existing shareholders.
Soaring Cineworld share price
So why did the Cineworld share price jump by a quarter yesterday?
I think there are a few possible explanations. Some investors may expect creditors to sweeten a restructuring deal in a way that means existing shareholders are not completely wiped out. Speculators may also be seeing Cineworld as a meme share, like cinema chain AMC was before it.
On top of that, I do think the basic bones of the Cineworld business remain attractive: it has thousands of screens worldwide and cinema audiences are set to continue recovering. The issue is less with the basic business and more with its balance sheet.
Are the shares a bargain?
However, that balance sheet alarms me. It also makes it very difficult to value Cineworld shares.
Buying them therefore feels to me like speculation, not investment. The long-term trend in the Cineworld share price has been disastrous. Despite yesterday’s jump, I think the shares could still end up going to zero. I do not see them as a bargain and in fact fear that even though selling for pennies, they could still be a value trap. I will not be adding them to my portfolio.