The Cineworld (LSE:CINE) share price has had a rough couple of weeks recently. The firm reached its highest point since February 2020 last month at 122p. But since then, the stock has tumbled by nearly 25p.
However, over the last 12 months, it’s still up by more than 80%. So is this an opportunity to add the business to my portfolio at a discount?
The rising Cineworld share price
As the vaccine rollout continues to progress both here in the UK and in the US, lockdown restrictions have begun easing. UK cinemas are set to reopen in May. Meanwhile, Cineworld has already started reopening its locations across America, albeit at a reduced capacity. Given that the US is responsible for generating nearly 75% of total revenue, this is quite encouraging.
Godzilla vs Kong is one of the few films that studios decided to release while many cinemas are still closed. And yet, even though Warner Bros offered a home streaming option, the film still grossed $32.2m in cinemas over its opening weekend. This not only beat expectations, but also set a new record for ticket sales since the pandemic began.
It looks like Cineworld is finally getting some much-needed income flowing back into the business. And with a long line-up of delayed titles like the latest James Bond movie, I’m cautiously optimistic about people quickly returning to enjoy the big screen experience.
The risks are still high
The reopening of cinemas is undoubtedly fantastic news for Cineworld and its share price. But I believe there remains quite a considerable level of risk attached to this company. Most notably, the level of debt.
This is something I’ve previously discussed. As cinemas were closed for a large portion of 2020, Cineworld had to rely on debt financing to keep up with expenses. Unfortunately, this has resulted in total debt & equivalents on the balance sheet increasing to $8.3bn since the start of 2021. That represents around 97% of its capital structure.
I find this degree of financial leverage quite concerning, especially since the firm has limited profits to keep up with incoming interest payments. Even if the reopening of cinemas allows Cineworld to return to pre-pandemic levels of operation, I think it could be many years before its level of debt is brought back under control. During that time, it will likely be unable to continue pursuing its acquisitive growth strategy, as well as limiting the amount of income returned to shareholders through dividends. Both of which are likely to hurt the Cineworld share price over the long term.
The bottom line
Needless to say, I believe that an investment in this business carries a lot of risks. The Cineworld share price does look like it’s on an upward trajectory of recovery. But I think this will be a multi-year process and thus won’t happen in 2021 alone.
Personally, I believe there are far greater investment opportunities available today at a considerably lower level of risk. And so, I won’t be adding the company to my portfolio anytime soon.