There has been no shortage of thrills, spills, and plot twists for long-suffering shareholders in Cineworld (LSE: CINE). Imagine if a year ago I had £100 in £10-notes and burned nine of them. I would still now have more money left than if I had invested that money in shares of the cinema chain! That is because the Cineworld share price is down 93% in just 12 months.
The shares have soared in the past month, moving up 83%. But lately they have been tumbling again, losing 27% of their value in the past five days.
If I bought now and the shares recovered even some of their former value, I could perhaps profit handsomely. Should I do this?
Price swings as a warning signal
There are all sorts of reasons why share prices move around, sometimes dramatically.
But when I see price action like we have seen lately with Cineworld shares, an alarm bell goes off in my head. Typically a share does not move around by such large amounts in a matter of weeks or days.
When that happens, it can sometimes mean that the share price does not primarily reflect the sales or purchases of long-term investors assessing the company’s commercial prospects. Instead, such wild price swings can suggest that a share is being heavily traded by short-term speculators. I am an investor, not a speculator.
Buying a stake in a business
Like Warren Buffett, I see buying a share as purchasing a tiny stake in a business.
If someone offered to sell me the whole Cineworld business today I would not touch it with a bargepole. The market capitalisation of £63m certainly sounds low for a company with thousands of screens and a strong market position. Although cinema admissions remain far below pre-pandemic levels, they are growing and that could boost Cineworld’s revenues.
But the issue that would stop me buying the business is its horrendous balance sheet. Net debt stood at $8.8bn at the end of June. While the first six months saw operating activities generate positive cash flow of $413m, that was more than gobbled up by financial needs, meaning the business continued to bleed cash. Massive debt and cash outflows are a bad combination for business survival.
None of that sounds like a business I would want to own. For the same reason, I would not buy Cineworld shares for my portfolio at the moment.
Can the Cineworld share price recover?
That does not mean that the Cineworld share price might not move up again.
I do not see it recovering to its pre-pandemic levels unless the business performance and balance sheet are transformed. If it happens at all, that will likely take years.
It could bounce up from here again, though, to recover at least some of its recent losses. Investor expectations for the company are so low that any positive news about its survival prospect – such as debt renegotiation – could tempt more buyers into the market. Cineworld management has shown a dogged commitment to try and make the company survive in one form or another. I expect that to continue.
That does not change my view of the business as an investment prospect, though. I am happy not buying a front-row seat for this horror movie!
This post was originally published on Motley Fool
