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3 reasons why the Cineworld share price rallied 16% last week

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Jonathan Smith
·3-min read
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Hand arranging wood block stacking as step stair on paper pink background
Hand arranging wood block stacking as step stair on paper pink background

In terms of companies that have been hit hard by the pandemic, Cineworld (LSE:CINE) definitely ranks highly. The UK’s largest cinema operator has 127 sites here, as well as hundreds of others in the US. Due to lockdowns, cancelled movie releases and very limited demand for consumers to enter a confined space surrounded by strangers, the business has really struggled. Technically, the Cineworld share price is up 121% over the past year, but this time period cuts off the stock market crash from earlier in March 2020.

Upcoming results

Pulling the time frame out to two years gives a better indication on the state of the company. The Cineworld share price is down almost 50% over two years. If I now pull in the time frame to one week, it shows me that the shares rose an impressive 16%. From this I gather that the long-term past performance hasn’t been great, but it seems to be improving in the short term.

One reason for this is the anticipation of full-year results. These are due out this week, with an expectation of posting a pre-tax loss around £500m. So why is the Cineworld share price rallying? I think it’s a similar story to what we saw with Rolls-Royce shares recently. Despite posting a loss of £2.9bn, the shares rallied simply because investors were prepared for the bad news. The loss was discounted, and the outlook was positive for 2021, so people bought the shares.

I think this is the same case for Cineworld. I already know a large loss is coming, so that won’t surprise me. It’s actually more likely that there will be something positive to take from the report, such as higher liquidity or new plans to bounce back. It seems I’m not alone in my thinking, and investors are buying Cineworld shares in anticipation of this.

Cineworld shares pushed higher by vaccine news

Another reason the Cineworld share price rallied last week was due to positive news concerning the vaccination initiatives in both the UK and US. Here in the UK, over half the adult population has been vaccinated. In the US, the vaccination figure hit 100m last Friday. Both are positive statistics that support the reopening of cinemas.

In the UK, cinemas are expected to reopen in the middle of May. Cineworld secured over £500m of funding late last year that will keep it running until May. So the vaccine numbers coming out from the Government are helping to push the Cineworld share price higher. It looks like the business may be able to survive.

Yet despite this short-term boost, I still see plenty of risks to the Cineworld share price being able to continue such a rally. I don’t have time to run through them all, but one key issue is the rise of competitors such as Netflix. We’ve got the Oscars coming up, and incredibly Netflix has a record 35 nominations! So traditional cinemas could quickly become irrelevant as streaming platforms (turned studios) take over.

Also, even with a bounce-back, it may take some time for cinema attendance to reach 2019 levels. And let’s not forget the heavy debt load the company has.

From my point of view, I won’t be buying Cineworld shares any time soon, even with the move higher recently.

The post 3 reasons why the Cineworld share price rallied 16% last week appeared first on The Motley Fool UK.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Netflix. 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.

Motley Fool UK 2021