Cineworld (LSE: CINE) shares have, without a doubt, been one of the most challenging stocks for investors to hold this year. The stock has been on a volatile journey as rolling restrictions have closed, then opened, then closed its cinemas around the world.
However, the outlook for the company and the cinema industry, in general, is now starting to improve. As such, I’m beginning to wonder if Cineworld shares might be a good addition to my portfolio next year?
Are Cineworld shares a bargain?
The value of this company looks cheap compared to its trading history. But there’s more to the business than its share price. The underlying fundamentals of the operation are far more important when considering the long-term prospects for an investment.
From a fundamental perspective, the figures are hardly reassuring. Cineworld has a tremendous amount of debt, which requires hundreds of millions of dollars in interest payments every year. At the time of writing, most of the company’s cinemas are closed, which means it cannot produce the income required to cover debt costs.
That’s a big red flag. Of course, this situation could begin to improve next year. A widespread vaccine rollout would reduce customer anxiety about visiting cinemas, and the company may be able to start selling tickets again. That’s the best-case scenario. Unfortunately, nothing is guaranteed here. Customers may return and save the business, but there’s also a chance they won’t return fast enough.
This uncertainty makes it difficult for me to place a value on Cineworld shares right now.
Major headwinds
Another problem facing the firm is the availability of films. Earlier this year, the company was forced to mothball its cinemas when the producer of the latest James Bond instalment decided to postpone the release. This is a severe issue Cineworld cannot control.
Cinema operators are, to a certain extent, at the mercy of film producers. There’s a vast movement under way to giving streaming services more rights, which would reduce revenues for cinemas in the long run. This trend could have a significant detrimental impact on Cineworld shares as overall revenues in the sector come under pressure.
This is the last thing the organisation needs right now. Customers don’t need yet another reason not to visit the group’s locations.
The bottom line
Considering all of the above, I think I am going to continue to avoid Cineworld shares in the new year.
The company is facing significant pressure on several fronts. While recent vaccine news has put a light at the end of the tunnel for the group, there’s no guarantee a return to normality will help the business return to 2019 levels of profitability. High levels of borrowing may also continue to weigh on the group’s bottom line for many years to come.
In my opinion, there are other options out there that may produce higher total returns for investors in the years ahead.
