The Cineworld (LSE: CINE) share price has staged a modest recovery over the past couple of weeks.
After the shares plunged to a low of 28p in December, the lowest level since the second quarter of 2020, the stock recovered to 42p. This performance in itself is impressive. A gain of 50% in just a few weeks suggests that the firm’s outlook has changed entirely.
However, I need to put this into perspective. Over the past year, the Cineworld share price has lost 40%. Recent gains have only made a modest dent in the declines of the past year.
But could this be a sign of things to come for the company in the year ahead? As the economy opens up, Cineworld is reporting a stronger trading performance. If this continues, the group’s outlook could change dramatically.
Recovery in progress
Whenever I have covered the stock over the past couple of years, I have noted that the group’s days could be numbered without a substantial recovery in free cash flow. Without cash flow, the company will struggle to pay staff, invest in its cinemas and pay off its debt obligations.
As the economy has slowly recovered over the past 12 months, Cineworld has issued a series of upbeat trading updates. Trading has recovered relatively quickly, and now it looks as if the business has reached the critical free cash flow benchmark.
According to a trading update issued last week, group revenue hit 88% of 2019 levels in the fourth quarter. Thanks to aggressive cost-cutting efforts, this helped the business generate a positive cash flow in the last quarter of 2021.
This is a landmark for the enterprise that cannot be understated. It shows that the company is generating free cash, the lifeblood of any business. After nearly two years of losses, this tells me that the firm could return to stability in 2022.
Of course, there are plenty of other risks for the Cineworld share price on the horizon.
Debt interest costs are eating up a considerable amount of resources. It will take years to pay down these obligations.
What’s more, the corporation is facing a huge potential liability from its aborted Cineplex deal. The enterprise is appealing a decision to award Cineplex £800m to cover lost synergies from the merger. Cineworld is appealing the decision, but this cloud could continue to hang over the firm for some time.
Cineworld share price outlook
Even after taking this headwind into account, it is clear to me that Cineworld is moving forward. If the company continues to generate positive cash flow in the quarters ahead, the market’s view of the business could change, which may drive a re-rating of the share price.
As such, I think the outlook for the stock in 2022 is improving. Assuming there are no more restrictions or negative surprises, the firm’s fundamentals could continue to improve, translating into a higher share price.
Still, I am not buying the shares for my portfolio right now despite this potential. I am going to wait on the sidelines for more progress before building a position.
