The Cineworld (LSE: CINE) share price is having a storming start to 2022. Already this year, the stock is up 39% as I write today. However, to throw cold water on the fire, over one year the share price is still down by 35%. Ouch.
Does the recent surge mean the cinema chain is back on track? Or is it a false dawn and not worth me buying the shares? Let’s take a closer look.
The bull case
It seems like the worst of the pandemic may be over. Thankfully, Omicron didn’t require a lockdown like previous strains of Covid, even though case numbers spiked. Unless there’s another more severe mutation, I can’t see there being any further lockdown either. This will clear a huge potential risk from Cineworld’s business, and likely lead to raised profit guidance in the months ahead.
Recent trading supports this view. In an update from Cineworld released just this week, the company said attendances have steadily grown through the second half of 2021. Revenue has also grown in line with the increases in attendance. The improved revenue profile together with cost controls has resulted in positive cash flow in the fourth quarter of 2021 too.
The bear case
One of the biggest risks to the shares is the considerable debt on Cineworld’s balance sheet. According to the last published accounts, the company had $8.4bn of net debt. Considering that Cineworld’s market value is only £610m, and is currently loss-making, this borrowing is highly significant. It’ll be crucial for Cineworld to maintain its positive cash flow in the months ahead so it can service this debt load.
There’s another big uncertainty on the horizon for Cineworld. It’s been ordered to pay C$1.23bn by a Canadian court ruling due to a breach of an agreement with Cineplex. Before the pandemic, Cineworld had agreed to acquire Cineplex, but pulled out of the deal when it had to close its cinemas during lockdown. Cineworld is appealing the ruling, but it still leaves a dark cloud over the business for now.
Should I buy at this Cineworld share price?
There’s no doubt that Cineworld has had a very difficult period through the pandemic. However, I’m most interested in the potential for recovery if I buy its shares today. Earnings are expected to rebound into positive territory in 2022. Then, all going well, City analysts are expecting huge growth in earnings again in 2023. If this plays out, the Cineworld share price is valued on a price-to-earnings ratio for 2023 of only 5.
However, there’s a lot for the company to deal with before then. For a start, the company has to stay cash flow positive so that it can pay interest on that huge debt pile. Then, the looming court ruling could also shatter Cineworld’s balance sheet if it ends up having to pay the damages after the appeal.
So, for now, there are just too many risks for me to want to buy the shares. The valuation looks cheap, but I think it takes into account these significant risks ahead. I’ll revisit the company once the outlook on the court ruling is clearer.
