Over the past two years, I have warned investors about the risks of investing in Cineworld (LSE: CINE).
However, it looks to me as if the outlook for the company is now improving. Customers are returning to the group’s cinemas, spending money and helping the firm generate cash to meet its massive debt obligations.
It has also pushed forward with a significant marketing initiative to help draw customers back. After the company’s slashed its entry fee across the portfolio to £3 last week, it seems as if consumers hurried to take up the offer.
Risks ahead
Now I am not willing to become a Cineworld share price bull just yet. I think the company’s outlook is improving. Still, I also acknowledge it will face some significant challenges over the next few years. It is still fighting a bitter legal battle with its peer, Cineplex, in Canada. The firm will also have to do something about its momentous debt pile.
The cost of this debt will only increase as the Bank of England hikes interest rates. This makes it even more critical that the corporation starts to reduce its obligations to creditors.
Nevertheless, the fact that consumers are starting to return is incredibly positive. As I noted above, as consumers return, the company should be able to return to profit. More importantly, it should be able to generate cash flow to meet creditor obligations.
Cineworld share price outlook
Only a couple of months ago, City analysts were still expecting the corporation to report massive losses in 2022. According to current projections, the company will lose money, but losses are expected to be significantly below initial expectations.
Indeed, the company is set to report a net loss of $13m for 2022. It is disappointing that the business is still going to lose money as the world reopens, but a loss of $13m is a significant improvement on the $2.7bn deficit reported for the 2020 financial year.
These figures are subject to change, and I think they could improve to the upside if consumer sentiment across the UK continues to improve. Even though the cost of living crisis may impact consumer sentiment, the reopening of the economy may offset some of this headwind.
So overall, I think the outlook for the Cineworld share price is improving. As such, I would be happy to buy a speculative position in the stock for my portfolio.
However, I will also be keeping an eye on the challenges I have outlined above. The company faces numerous risks, from the cost of living crisis to rising interest rates, which could change its outlook overnight. And there is also the Canadian legal battle rambling on in the background.
With the enterprise dealing with so many challenges, I am not ready to go all-in just yet.
Rupert Hargreaves has no position in any of the shares mentioned. 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.
