My local cinema is a Cineworld (LSE:CINE), which I plan to visit soon. It’s been a terrible time for the Cineworld share price and its business as a whole since the market crashed. With reopening in full effect, is Cineworld a recovery play?
Cineworld share price downs and more downs
Cineworld is the world’s second-largest cinema chain with over 9,000 screens in 10 countries and a workforce of over 30,000. In 2020, Covid-19 forced the business to grind to a catastrophic halt. Performance was affected massively. To provide a snapshot, revenue between 2019 and 2020 fell by a mammoth 80% from $4.37bn to $852m due to lockdowns and closed cinemas across the world.
The Cineworld share price has experienced a roller-coaster ride due to the pandemic and poor performance. The past two months have seen it fall by over 20% from 122p to 96p per share, which is the price as I write. The past 12 months has actually seen a price increase of close to 40%. This time last year shares were trading for 69p per share.
Rewind to two years ago, and the Cineworld share price was flying high at well over 310p per share. This was an all-time high. By May 2020, it had fallen to less than 60p per share.
Recovery play option?
As a Foolish investor, I always look to invest for the long term. In the case of Cineworld, it would have to be VERY long term. Pent-up demand could definitely play a part in increasing seat sales and getting Cineworld back to its former glory. The Cineworld share price did creep up when the vaccination programme was announced back in November. As the rollout continues, I expect its share price to continue on an upward trajectory too.
From a financial point of view, Cineworld will be weighed down by a debt of over $8bn. On the other hand, it does have plenty of cash and liquidity to support it through its recovery. In a trading update yesterday, Cineworld announced a $203m tax refund from the US government, which will boost the coffers. In addition, Cineworld reported that ticket sales for new movies coming out were strong. The sheer size and footprint of Cineworld’s operation does offer it an advantage and the ability to recover from a challenging period quicker than other firms in the leisure industry.
My verdict
The Cineworld share price comes with its own risks. To be specific, Cineworld’s debt level does concern me. It will take a number of years of normal trading to put a dent in that type of debt. And what does normal trading mean? Pre-Covid-19 levels of trading would be ideal but that’s the other risk here. With the risk of additional Covid-19 variants, Cineworld could find itself facing local and national restrictions once more and be forced to close its doors. Then there is the risk of competition and the rise of streaming services such as Netflix gaining market share rapidly.
Overall, I can understand why others believe Cineworld could be a good recovery play. The Cineworld share price is cheap at current levels and as a business has the ability to recover eventually. I would not buy it for my own portfolio right now as I believe there are better recovery options out there.
