Key points
- Cineworld is currently appealing a £722m damages judgement by the Ontario Superior Court
- Box office revenue has almost returned to pre-pandemic levels
- With a lower forward P/E ratio than a major competitor, the firm may be undervalued
As the world begins to reopen after the Covid-19 pandemic, more people are starting to return to the cinema. While restrictions were in place, the Cineworld (LSE: CINE) share price suffered massively. With steadily increasing box office revenue, however, could this be the time for me to add to my existing position? Are there any threats on the horizon with which the company has to contend? I have a spare £500 and I want to know whether I should buy more shares. Let’s take a closer look.
Ongoing litigation and the Cineworld share price
In December 2021, the Ontario Superior Court ordered Cineworld to pay over £700m in damages to Canadian peer Cineplex. This was due to the withdrawal of Cineworld from a takeover deal for Cineplex. Unsurprisingly, the Cineworld share price collapsed, falling around 50% in one day. At the time of writing, it is 34.28p, up over 25% from the 52-week low.
The firm responded to the judgement by launching an appeal. In January 2022, however, things took an even more complicated turn. Cineplex opted to cross-appeal the appeal! As a Cineworld shareholder, I see this as positive news, because the cross-appeal suggests that Cineplex believes the damages could be considered too high. The issue could take months or even years to conclude and I will be watching very closely.
Strong recent results for this cheap stock
In a trading update for the six months to 31 December 2021, the firm announced that group box office revenue for December 2021 was 88% compared to the same period in 2019. This was an increase from 50% in July 2021. Furthermore, revenue for the US operations was 91% of 2019 levels in December 2021.
Although results are not quite back to pre-pandemic levels, they are not far away. It is worth noting, however, that any new pandemic variant may negatively impact the Cineworld share price. With a number of films scheduled for release in 2022, like The Batman, Mission: Imp0ssible 7, and Minions: The Rise of Gru, I think the company will have a much better year.
What’s more, the firm may be cheap at current levels. It has a forward price-to-earnings (P/E) ratio of 2.07. This compares to Cineplex’s higher ratio of 33.44. The company’s lower P/E may be an indication that it is undervalued and this is attractive to me.
I have held Cineworld shares for a few months and recent price movement has been difficult to watch. Nonetheless, box office revenue is going in the right direction. While I will not be spending my spare £500 on more shares in the company for now, I will not rule out a further purchase in the future.
Andrew Woods owns shares in Cineworld. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
